Response to consultation on draft Guidelines on IRRBB and CSRBB
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Such caps would not only be at odds with evidence for some NMD’s but would jeopardize the business models whereby the NMD’s are a natural offset of long-term fixed rate loans (e.g. fixed rate mortgages). This would lead to wrong interest rate risk mitigation transactions, expose banks to more interest rate risk and force a change in business models by modifying the capacity to offer long-term loans to customers.
Furthermore, the mandate to the EBA on the definition of SOT explicitly excludes behavioural assumptions (CRD Art.98(5a): ‘common modelling and parametric assumptions, excluding behavioural assumptions). The suggested introduction of caps on NMD’s in the general framework of IRRBB management appears as EBA working around the mandates that it received.
Suggested caps on NMD’s should be deleted.
The requirement to apply the Standardized Methodology for the evaluation should relate to the evaluation component of the Internal Management System (IMS) that should be evidenced as non-satisfactory. In other words, a framework that would be assessed as non-satisfactory for issues that are not related to its evaluation component of its IMS should not lead to require using the Standardized Methodology.
As any Standardized Methodology would not be risk sensitive, as made clear by BCBS, it should be clarified that requiring its application should follow a careful analysis to evidence whether the Standardized Methodology would be more risk sensitive than the IMS evaluation it would substitute. Bar such an evidence, Standardized Methodology should not apply. Moreover, the GL should require competent authorities to grant institutions the possibility to remedy potential shortcomings in their IMS within a reasonable period of time before the Standardized Methodology is imposed. Last but not least, if the Standardized Methodology was imposed after all, this should only be temporary and a return to IMS should be allowed as soon as possible.
• the CP envisages to change the definition of commonly understood Net Interest Income (NII) to include changes in fair values of instruments even though they are not part of NII. This appears as a deviation from the CRR mandate that explicitly refers to NII. It also deviates from BCBS Standards that is quite explicit that it refers to NII excluding changes in fair values that do not affect NII. This would also be at odds with actual risk management and would introduce overlapping between NII measures and Economic Value (EV) measures while they should be complementary.
NII should be kept as defined by interest income and expenses.
CSRBB should relate to fair-valued assets that are actively traded on a deep and liquid markets so as to have identifiable and measurable market perception and changes thereof. Derivatives, if any, that are hedging CSRBB should be clarified as included in CSRBB. Pension obligations and pension plan assets should be clarified as being excluded from CSRBB.
We also noted that the EBA by means of article 14 has expanded the scope of article 84.6c for CSRBB, where institutions are only obliged to assess and monitor credit spread risk. Article 14 of this CP would also oblige institutions to control credit spread risk. However, in article 84 the CRD explicitly differentiates between IRRBB and CSRBB, where the management and mitigation is limited to IRRBB. Therefore, asking institutions to control credit spread is beyond the mandate of the EBA and not deemed proportionate.
CSRBB should relate to fair-valued assets that are actively traded on a deep and liquid markets so as to have identifiable and measurable market perception and changes thereof. Derivatives, if any, that are hedging CSRBB should be clarified as included in CSRBB. Pension obligations and pension plan assets should be clarified as being excluded from CSRBB.
We also noted that the EBA by means of article 14 has expanded the scope of article 84.6c for CSRBB, where institutions are only obliged to assess and monitor credit spread risk. Article 14 of this CP would also oblige institutions to control credit spread risk. However, in article 84 the CRD explicitly differentiates between IRRBB and CSRBB, where the management and mitigation is limited to IRRBB. Therefore, asking institutions to control credit spread is beyond the mandate of the EBA and not deemed proportionate.
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.
• The CP envisages a new limitation to the duration of Non Maturing Deposits (NMD’s) (i.e. a 5 year cap on NMD’s from retail and non-financial wholesale, and a 0 year cap on NMD’s from financial customers) following a said “prudent” approach. These caps are inconsistent with a prudent approach since interest rate risk is a symmetric risk. Without any economic justification, they would lead to inappropriate measurement and management if incorporated in a management framework. Such caps are neither in CRR / CRD nor in BCBS Standard (where such caps appear only in the non-mandatory standardized method).Such caps would not only be at odds with evidence for some NMD’s but would jeopardize the business models whereby the NMD’s are a natural offset of long-term fixed rate loans (e.g. fixed rate mortgages). This would lead to wrong interest rate risk mitigation transactions, expose banks to more interest rate risk and force a change in business models by modifying the capacity to offer long-term loans to customers.
Furthermore, the mandate to the EBA on the definition of SOT explicitly excludes behavioural assumptions (CRD Art.98(5a): ‘common modelling and parametric assumptions, excluding behavioural assumptions). The suggested introduction of caps on NMD’s in the general framework of IRRBB management appears as EBA working around the mandates that it received.
Suggested caps on NMD’s should be deleted.
Question 2: Do respondents find that the criteria to identify non-satisfactory IRRBB internal models provide the minimum elements for supervisors’ assessment?
• the CP provides principles for the assessment by competent authorities of the management framework for IRRBB and CSRBB. Broadly, those principles make sense to cover the different dimensions of the management framework. However, to the extent that the assessment could lead competent authorities to require banks to apply the Standardized Methodology for the evaluation of IRRBB, it is essential to better frame the conditions under which banks such a requirement could apply.The requirement to apply the Standardized Methodology for the evaluation should relate to the evaluation component of the Internal Management System (IMS) that should be evidenced as non-satisfactory. In other words, a framework that would be assessed as non-satisfactory for issues that are not related to its evaluation component of its IMS should not lead to require using the Standardized Methodology.
As any Standardized Methodology would not be risk sensitive, as made clear by BCBS, it should be clarified that requiring its application should follow a careful analysis to evidence whether the Standardized Methodology would be more risk sensitive than the IMS evaluation it would substitute. Bar such an evidence, Standardized Methodology should not apply. Moreover, the GL should require competent authorities to grant institutions the possibility to remedy potential shortcomings in their IMS within a reasonable period of time before the Standardized Methodology is imposed. Last but not least, if the Standardized Methodology was imposed after all, this should only be temporary and a return to IMS should be allowed as soon as possible.
• the CP envisages to change the definition of commonly understood Net Interest Income (NII) to include changes in fair values of instruments even though they are not part of NII. This appears as a deviation from the CRR mandate that explicitly refers to NII. It also deviates from BCBS Standards that is quite explicit that it refers to NII excluding changes in fair values that do not affect NII. This would also be at odds with actual risk management and would introduce overlapping between NII measures and Economic Value (EV) measures while they should be complementary.
NII should be kept as defined by interest income and expenses.
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?
• the CP envisages dramatic changes to the definition and scope of Credit Spread Risk in the Banking Book (CSRBB) while the July 2018 EBA Guideline already implemented the BCBS Standard that has not changed since then. The envisaged changes are not substantiated and they would also introduce significant confusions and complexities.CSRBB should relate to fair-valued assets that are actively traded on a deep and liquid markets so as to have identifiable and measurable market perception and changes thereof. Derivatives, if any, that are hedging CSRBB should be clarified as included in CSRBB. Pension obligations and pension plan assets should be clarified as being excluded from CSRBB.
We also noted that the EBA by means of article 14 has expanded the scope of article 84.6c for CSRBB, where institutions are only obliged to assess and monitor credit spread risk. Article 14 of this CP would also oblige institutions to control credit spread risk. However, in article 84 the CRD explicitly differentiates between IRRBB and CSRBB, where the management and mitigation is limited to IRRBB. Therefore, asking institutions to control credit spread is beyond the mandate of the EBA and not deemed proportionate.
Question 4: As to the suggested perimeter of items exposed to CSRBB, would you consider any specific conceptual or operational challenge to implement it?
• the CP envisages dramatic changes to the definition and scope of Credit Spread Risk in the Banking Book (CSRBB) while the July 2018 EBA Guideline already implemented the BCBS Standard that has not changed since then. The envisaged changes are not substantiated and they would also introduce significant confusions and complexities.CSRBB should relate to fair-valued assets that are actively traded on a deep and liquid markets so as to have identifiable and measurable market perception and changes thereof. Derivatives, if any, that are hedging CSRBB should be clarified as included in CSRBB. Pension obligations and pension plan assets should be clarified as being excluded from CSRBB.
We also noted that the EBA by means of article 14 has expanded the scope of article 84.6c for CSRBB, where institutions are only obliged to assess and monitor credit spread risk. Article 14 of this CP would also oblige institutions to control credit spread risk. However, in article 84 the CRD explicitly differentiates between IRRBB and CSRBB, where the management and mitigation is limited to IRRBB. Therefore, asking institutions to control credit spread is beyond the mandate of the EBA and not deemed proportionate.