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  1. Home
  2. Single Rulebook Q&A
  3. 2024_7218 Clarification of allocation of cash flows from floating rate instruments with amortizing principal for evaluating interest rate risk in the banking book using the standardised methodology
Question ID
2024_7218
Legal act
Directive 2013/36/EU (CRD)
Topic
Interest Rate Risk for Banking Book (IRRBB)
Article
84
Paragraph
5
Subparagraph
1
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
Not applicable
Type of submitter
Individual
Subject matter
Clarification of allocation of cash flows from floating rate instruments with amortizing principal for evaluating interest rate risk in the banking book using the standardised methodology
Question

How should cash flows from floating rate instruments with amortizing principal be allocated into repricing time buckets under the standardised methodology for evaluating interest rate risk in the non-trading book?

Background on the question

Article 7 of COMMISSION DELEGATED REGULATION (EU) 2024/857 (delegated regulation) sets out the procedure for allocating the notional repricing cash flows deriving from non-trading book positions in floating rate instruments to the relevant repricing time buckets .

However, no specific procedure is mentioned for floating rate instruments with amortizing principal. In fact, the article 7 seems to set the procedure only for instruments where the principal is not amortizing.


Points a) and b) of the article 7 in the delegated regulation correspond to the Basel framework (Interest rate risk in the banking book Standards Interest rate risk in the banking book (bis.org)) , specifically paragraph 106, subparagraph 2.

 

Floating rate positions: such positions generate cash flows that are not predictable past the next repricing date other than that the present value would be reset to par. Accordingly, such instruments can be treated as a series of coupon payments until the next repricing and a par notional cash flow at the time bucket midpoint closest to the next reset date bucket.

 

However the par notional cash flow (in the Basel standards) or the 'remaining principal amount, as per the contractual agreement' (in the delegated regulation) would not be reflective of the principal amortization after the repricing date (as the reset to par mentioned in the Basel standards works only for instruments without amortizing principal) and thus applying the slotting procedure from Article 7 of the delegated regulation directly to floating rate instruments with amortizing principal would lead to overestimation of the net interest income (in case of floating rate amortizing loans) and subsequently to distorted results of changes in the net interest income under different scenarios. 

 

Submission date
10/10/2024
Rejected publishing date
21/02/2025
Rationale for rejection

This question has been rejected because the issue it deals with is already explained or addressed in, Article 1(1)(a) to (c) of Commission Delegated Regulation (EU) 2024/857, in conjoint with Article 7 of the same DR. 

The Single Rule Book Q&A tool has been established to provide explanations and non-binding interpretations on questions relating to the practical application or implementation of the provisions of legislative acts referred to in Article 1(2) of the EBA’s founding Regulation, as well as associated delegated and implementing acts, and guidelines and recommendations, adopted under these legislative acts.

For further information on the purpose of this tool and on how to submit questions, please see “Additional background and guidance for asking questions”.

 

Status
Rejected question

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