Response to consultation on draft Guidelines on IRRBB and CSRBB
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Due to risk described above and taking into account that rebuilding IMS to fit Standard methodology is operationally time-consuming, trigger for being forced to use fallback methodology should be clear and predictable. As a consequence I recommend eradicating discretion from GL regarding satisfaction of IMS and limit criteria to using or not proper risk measures described in Annex II according to institution category level.
In my opinion we should specify that since CSRBB by definition measures changes of market price, then CSRBB refers exclusively to instruments that have market price and are quoted on deep and liquid market.
In my opinion those instruments should be excluded from CSRBB.
During the public hearing there were discussed various approaches to measuring CSRBB for some kinds of instruments with use of benchmark yield curves for specific credit rating. For some markets, jurisdictions, currencies there's no liquid, observable yield curves for specific credit class. As a consequence there’s no referring point to measure spread volatility that by definition is managed within CSRBB. In practice no bank sells its retail deposit base on a monthly basis so that measuring its price volatility and reporting every quarter could make sense. Measuring fair value of bank’s loan portfolio is done seldom, usually within M&A process, it’s one-off process and it takes months to construct for each homogenous subportfolio an adequate fair value model and it’s main drivers are idiosyncratic credit risks. Measuring credit spread volatility (no liquidity spread volatility because there’s no liquidity) and reporting it to the management body every quarter brings no value added since bank won’t sell its loan and deposit portfolios within quarter to manage this risk because there’s no deep and liquid market and bank in a normal course of a business doesn’t plan to shut-down within quarter.
Due to above mentioned challenges please limit CSRBB to instruments that have available market price on deep and liquid market. For maximum precision we could use IFRS fair value level 1 definition.
Question 2: Do respondents find that the criteria to identify non-satisfactory IRRBB internal models provide the minimum elements for supervisors’ assessment?
According to rationale and statement presented during the public hearing Standard and Simplified Standard methodologies are a kind of fallback methodologies that institution may be forced to comply with should its IRRBB models be considered non-satisfactory. However wording of GL itself is flexible enough so that local regulator may consider those methodologies as a kind of benchmark approach. In this case institution may be expected to justify case by case why it considers its IMS better than standard/benchmark. Since we should avoid “one model fits all” approach we recommend clear and precise indication within GL that above mentioned approach is not the case.Due to risk described above and taking into account that rebuilding IMS to fit Standard methodology is operationally time-consuming, trigger for being forced to use fallback methodology should be clear and predictable. As a consequence I recommend eradicating discretion from GL regarding satisfaction of IMS and limit criteria to using or not proper risk measures described in Annex II according to institution category level.
Question 3: Is there any specific element in the definition of CSRBB that is not clear enough for the required assessment and monitoring of CSRBB by institutions?
According to definition CSRBB is the risk driven by changes of the market price for credit risk, for liquidity and for potentially other characteristics of credit-risky instruments, which is not captured by IRRBB or by expected credit/(jump-to-) default risk. Whole GL.124 states „124. Institutions should not exclude any instrument in the banking book from the perimeter of CSRBB ex ante, including assets, liabilities, derivatives and other off-balance sheet items such as loan commitments, irrespective of their accounting treatment. Any potential exclusion of instruments from the relevant perimeter should be done in the case of the absence of sensitivity to credit spread risk and should be appropriately documented and justified. In any case, institutions should not exclude assets accounted at fair value.”. GL describes whole CSRBB process: modelling, measuring, quarterly reporting etc. which doesn’t seem to fit most of the balance sheet, since for most of assets and liabilities there’s no market. Some institutions never experience selling their liabilities (deposits) or assets (loans) or experience it once in a life-time (while in M&A process). Setting-up CSRBB process (including quarterly reporting) for that kind of instruments seems to have no positive value added, while due to costs of setting it up may bring negative value.In my opinion we should specify that since CSRBB by definition measures changes of market price, then CSRBB refers exclusively to instruments that have market price and are quoted on deep and liquid market.
Question 4: As to the suggested perimeter of items exposed to CSRBB, would you consider any specific conceptual or operational challenge to implement it?
Setting-up CSRBB for instruments that have no deep and liquid market seems difficult and brings no value added. Measuring spread volatility within the same credit rating for assets or liabilities that have no market and no observable price/yield is doubtful. Developing and implementing the whole process for instruments that are never traded (ie institution retail deposit base) or seldom traded (loan portfolio) seems pointless for improving interest rate risk management process.In my opinion those instruments should be excluded from CSRBB.
During the public hearing there were discussed various approaches to measuring CSRBB for some kinds of instruments with use of benchmark yield curves for specific credit rating. For some markets, jurisdictions, currencies there's no liquid, observable yield curves for specific credit class. As a consequence there’s no referring point to measure spread volatility that by definition is managed within CSRBB. In practice no bank sells its retail deposit base on a monthly basis so that measuring its price volatility and reporting every quarter could make sense. Measuring fair value of bank’s loan portfolio is done seldom, usually within M&A process, it’s one-off process and it takes months to construct for each homogenous subportfolio an adequate fair value model and it’s main drivers are idiosyncratic credit risks. Measuring credit spread volatility (no liquidity spread volatility because there’s no liquidity) and reporting it to the management body every quarter brings no value added since bank won’t sell its loan and deposit portfolios within quarter to manage this risk because there’s no deep and liquid market and bank in a normal course of a business doesn’t plan to shut-down within quarter.
Due to above mentioned challenges please limit CSRBB to instruments that have available market price on deep and liquid market. For maximum precision we could use IFRS fair value level 1 definition.