Response to consultation on draft Guidelines on IRRBB and CSRBB
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Let us recognize the very large uncertainty on the effective duration of NMDs. With competition from Fintechs, it is not yet clear how digital natives younger generation will remain loyal to their bank with sticky deposits and what will be the deposit rate elasticity. In such a situation of uncertainty, the proper way to evaluate and mitigate risk is not to impose an artificial cap of five years on NMDs. Let banks choose the effective deposit duration for different segments of clients. But then in running the stress test exercise, it is not only to run scenarios with large change of interest rates but also to look at shocks to the duration of NMDs. In the supervisory ICAAP exercise, one would check that the bank has enough equity to face each potential scenario.
Question 1: In the context of the measurement of the impact of IRRBB under internal systems, paragraph 111 envisages a five year cap repricing maturity for retail and non-financial wholesale deposits without a specified maturity. Would you foresee any unintended consequence or undesirable effect from this behavioural assumption in particular on certain business models or specific activities? If this is the case, please kindly provide concrete examples of it.
A single number – a cap of five years for the duration of non-maturity deposits (NMD’s) – creates a false sense of security. As an example, if the effective duration of zero-interest demand deposits is eight years, then investing in a five year-fixed income asset would create interest rate risk. In the case of a lower interest rate environment with assets maturing at end of five years, re-investing at a lower interest rate will reduce net interest income. This is the situation faced by many European banks in 2021.Let us recognize the very large uncertainty on the effective duration of NMDs. With competition from Fintechs, it is not yet clear how digital natives younger generation will remain loyal to their bank with sticky deposits and what will be the deposit rate elasticity. In such a situation of uncertainty, the proper way to evaluate and mitigate risk is not to impose an artificial cap of five years on NMDs. Let banks choose the effective deposit duration for different segments of clients. But then in running the stress test exercise, it is not only to run scenarios with large change of interest rates but also to look at shocks to the duration of NMDs. In the supervisory ICAAP exercise, one would check that the bank has enough equity to face each potential scenario.