Response to consultation on Guidelines on technical aspects of the management of interest rate risk

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Question 1: Are the definitions sufficiently clear? If not, please provide concrete suggestions and justify your answer.

Some definition are not clear enough for banking industry. We recommend to explain better the definition of CSRBB. Some examples indicated in this area would be welcomed.
Definition of conditional and unconditional cash flows is also not clear enough. In our opinion it requires presentation of more details – is it only connected to behavioural assumptions on client actions or optionality in products.

Question 2: Are the guidelines in section 4.1. regarding the general provisions sufficiently clear? If not, please provide concrete suggestions.

In paragraph 4.1 point 17 and paragraph 4.4.1 point 80.ii - guidelines for IRBB risk originated by interest rate derivatives it is not clear what measures are expected from institutions in that respect. It is also not clear what is understood by loan commitments - loans on forward and/or off balance commitments as overdraft lines.
In paragraph 4.1 point 18 there are no specific guidelines on CSRBB. Banks do not understand purpose of including CSRBB in IRRBB guidelines.
Calculation methods in annexes are not clear enough due to lack of base assumptions: using base scenario and stress scenarios of earnings measures and economic value measures. It is only included in Paragraph 4.1 point 15.

Question 3: Do you agree that cash flows from non-performing exposures (NPEs) should be net of provisions and treated as general interest rate sensitive instruments whose modelling should reflect expected cash flows and their timing for the purpose of EV and earnings measures? If not, please provide concrete suggestions and justify your answer.

We agree.

Question 4: Are the guidelines in section 4.2. regarding the capital identification, calculation, and allocation sufficiently clear? If not, please provide concrete suggestions and justify your answer.

In our opinion the paragraph 26 point f) of Capital adequacy assessment for IRRBB (the impact of embedded losses) should be clarified. The term “embedded losses” is very broad and general. It may be considered as a part of IFRS9 regime and in another aspects, however it is hard to define in what aspects, in particular in IRRBB. Therefore a clarification or explanation would be welcomed on what does that term means in practise for the purpose of the IRRBB risk measurement.

Question 5: Do you agree with the list of elements to be considered for the internal capital allocation in respect of IRRBB to earnings in paragraph 30? If not, please provide concrete suggestions and justify your answer.

We agree.

Question 6: Are the guidelines in section 4.3. regarding the governance sufficiently clear? If not, please provide concrete suggestions and justify your answer.

We agree.

Question 7: Are the guidelines in section 4.4. regarding the measurement sufficiently clear? If not, please provide concrete suggestions and justify your answer.

The paragraph 82 concerning commercial margins generates confusion in banks. It is not clear as in accompanying documents/treatment of commercial margins chosen option is to leave that choice for institutions. We agree with assumption that bank can choose whether to calculate measures with or without margins – in our opinion both measures should be used. We need to adjust our IT systems for that purposes.
Other topic of our concern is the text of annex I. On page 46 it is not clear why simple run-off assumption is mentioned. It is measure that is not reasonable/practical to interpret. It is also not mentioned in Annex II.

Question 8: Do you consider the comparison between EV metrics calculated using contractual terms for NMDs with the EV metrics calculated with behavioural modelled assumptions sensible and practical? Please justify your answer.

In our opinion comparison of measures of contractual and modelled NMD’s is practical. It delivers additional value in process of risk management. It allows to understand better the total risk generated by different strategies used in bank. It allows also to set the proper limits in this activity.

Question 9: Are the guidelines in section 4.5. regarding the supervisory outlier test sufficiently clear? If not, please provide concrete suggestions and justify your answer.

With regards to point 113 (c) (All Common Equity Tier 1 instruments and other perpetual own funds without any call dates should be excluded from the calculation of the Standard EVE outlier test) - Tier I interest bearing instrument includes IRR component and thus for the EVE calculation should be treated in the same way as all other interest bearing instruments including Tier II instruments.

Question 10: Is the proportionality adequately reflected in the guidelines, in particular in relation to the transitional period for SREP category 3 and 4 institutions and the frequency of calculation for the additional outlier test under paragraph 112?

We agree.

Question 11: If relevant, do you manage interest rate risk arising from pension obligations and pension plans assets within the IRRBB framework or do you cover it within another risk category (e.g. within market risk separately from IRRBB, etc.)?

We agree.

Question 12: Which treatment of commercial margins cash flows do you consider conceptually most correct in EV metric, when discounting with risk free rate curve: a) including commercial margins cash flows or b) excluding commercial margins cash flows? Please justify your answer.

The approach b) is preferred by banks. Exclusion of commercial margins enables to focus purely on interest rate risk without any credit/liquidity/other risk components. Also it helps to provide more comparability between banks in terms of interest rate risk management (commercial business model is not taken into account).

Question 13: Are your internal systems flexible enough to exclude margins for the purpose of calculating EV measures for the supervisory outlier test? If not, what would be the cost to adapt your systems (high, medium, low)? Please elaborate your answer.

The implementation of new proposed measures, which have to treated as additional to existing ones, and the obligation to report them periodically to supervisor will generate higher personal and institutional costs for banks. If we understand correctly the question, the proposal to look separately at the cash flow and the margin is complicated for banks. We do not see sufficient reasons why banks should implement these measures.

Question 14: Do you consider the level of the proposed linear lower bound as described in paragraph 113 (k) appropriate? If not, please provide concrete suggestions and justify your answer.

We appreciate the scenario should be stressed but also realistic and negative rates for tenors longer periods seems unrealistic. The step-up of floor should be shorter – 10Y only. It’s difficult to imagine, negative rates for the next 30 years, therefore we suggest to shorten the step-up period to more realistic one.

Question 15: Do you consider the minimum threshold for material currencies included into the supervisory outlier test (5% for individual currency and minimum 90% of the total non-trading book assets or liabilities) sufficient to measure IRRBB in term of EVE? If not, please provide concrete suggestions and justify your answer.

We agree.

Question 16: When aggregating changes to EVE in the supervisory outlier test, does the disregarding of positive changes to EVE have a material impact on the calculation of the supervisory outlier test?

Disregarding of positive changes to EVE for each currency may have material impact on supervisory outlier test. The proposed approach would differentiate banks having significant balance sheet currency mismatch (being exposed to correlation between interest rates for different currencies) from the banks having operations with only one currency (thus being exposed to only one interest rate). The aggregation of all positive and negative positions would more accurate measure risk exposure and make comparability across different banks more clear. To illustrate let’s assume we have two banks with the exactly the same long position in local currency but one of them on the top has also short position in EUR. Assuming the parallel curve shift stress scenario, both will present the same changes of EVE, while in fact the second back is less exposed, as there is a correlation among rates movement in different currencies.

Name of organisation

Polish Bank Association