Response to consultation on draft RTS on IRRBB supervisory outlier tests

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Respondents are also kindly requested to express whether they find an inclusion of market value changes in the calculation of the NII SOT clear enough.

We do find Articles 4 and 5 clear and manageable, however, point (b) of art. 5 misses clarity on the concept of “annual change” in the market value of financial instruments accounted at fair value, given that after any shock applied to those, the change on its market value is instantaneously measured in its price and therefore not deemed or separated in annual changes, regardless of their maturity. Please provide more clarity for point (b) of article 5.

Regarding the use of one year time horizon and constant balance sheet with current commercial margins for new business assumptions provides a more harmonized base for the methodology and therefore enhancing comparability across banks.
The recalibration of the lower bound for post-shock IR levels is in line with expectations.

Question 2: Do respondents have any comment related to these two metrics for the specification and the calibration of the test statistic for the large decline in Article 6 for the purpose of NII SOT? Specifically, do respondents find the inclusion of administrative expenses in metric 2 clear enough? Do respondents have any comment on the example on currency aggregation for metric 1 and metric 2?

We find option A more straightforward and allows direct relative comparison with EVE SOT as well across banks, while option B introduces some degree of estimation due to the inclusion of business model and cost structure parameters. The use of such parameters may impact differently each bank due to the different business models and cost structures across. Moreover, non-recurrent events that affect operating income and/or administrative expenses may result in biased alpha parameter and therefore biased NII metric. Ultimately, option B can penalize comparability across the banks and make difficult to calibrate the test statistic for the large decline definition.

Question 3: Do respondents consider that all the necessary aspects have been covered in the draft regulatory standard? Do respondents find the provisions clear enough or would any additional clarification be needed on any aspect?

The draft regulatory standard should have covered an analysis of banking business’s conditions in place in each country aiming to determine whether the level playing field is fair across all the banks within Euro that are to comply with the SREP on IRRBB specifically. As an example, in Portugal, there is a law, that determines that mortgage’s total interest rates cannot have a floor in place. In practical terms, this means that the banks have to pass on the entire Euribor rates to the operation’s final interest rate (most mortgages within the Portuguese banking market are variable rate operations: Spread+Euribor), which in some cases results in negative final rates for mortgages operations. If you consider that most of the Portuguese retail bank’s balance sheet is comprised of these operations and that they are to apply the standards for SREP, particularly now considering the recalibration of the lower bound for post IR shock while calculating NII SOT, one can say that the likelihood of Portuguese banks result as an a outlier is considerable.
Given this, we would like to find this regulatory standard designed to ensure fair level playing field for all the banks that are to comply with SREP, having in consideration jurisdictional business environment in place across Euro.

Name of the organization

BANCO BPI