EBA reflects on the short/medium term objectives of its interest rate risk in the banking book Heatmap

The European Banking Authority (EBA) today published a Report on the short to medium term objectives of its interest rate risk in the banking book (IRRBB) Heatmap, including observations and recommendations to institutions and supervisors.

Today’s Report addresses the main areas of scrutiny identified by the short to medium term objectives of the Heatmap following the EBA scrutiny on the IRRBB as published on January 2024. It also provides tools to support the assessment of IRRBB risks, without setting any new requirements or thresholds, so as to foster a common understanding of IRRBB risks. The key areas of focus are:

1. Non-maturity deposits (NMD) behavioural assumptions, where a non-exhaustive list of risk factors impacting NMD repricing behaviour is provided, and which could be considered by institutions when modelling the behaviour of their NMD. It also provides a toolkit to support supervisors in their analysis of NMD modelling.
2. A non-exhaustive set of complementary dimensions that supervisors could consider for institutions identified as outliers under the supervisory outliers test (SOT) on net interest income (NII). They reflect internal metrics commonly used by institutions without setting new requirements or thresholds. This builds on the EBA Opinion that SOTs are indicators to be taken into account with no automaticity under the Supervisory Review and Evaluation Process (SREP).
3. Commercial margins of NMD in the SOT on NII in the context of the constant balance sheet assumption. The Report clarifies that institutions should apply the same modelling assumptions on commercial margins as used in their internal measurement systems or, in their absence, consider a constant spread, across scenarios.
4. Hedging strategies, including a recommendation on the role of interest rate derivatives for prudent IRRBB management and specifying that the repricing modelling of NMD (and its role natural hedging) should be based on the specific features of NMD.

The EBA will continue its discussions with stakeholders on the various aspects identified in the medium to long term objectives of the Heatmap, such as monitoring the 5-year cap of the weighted average repricing maturity of NMD, credit spread risk arising from non-trading book activities (CSRBB) related aspects, and the Dynamic Risk Management (DRM) project of the International Accounting Standards Board (IASB).

Legal basis, background, and next steps

With the publication in the Official Journal of Commission Delegated Regulation (EU) 2024/856 (RTS on SOT) and Commission Delegated Regulation (EU) 2024/857 (RTS on SA) on 24 April 2024, and the publication of Commission Implementing Regulation (EU) 2024/855 (amending ITS on reporting) of 15 March 2024, the regulatory framework on IRRBB has been reinforced. In addition, the latest version of EBA’s Guidelines on IRRBB and CSRBB have been fully applicable in the EU since 31 December 2023.

The monitoring of the practical implementation of IRRBB standards is framed in the EBA monitoring duties, with a view to contributing to a consistent application of EU law and promoting common supervisory approaches and practices in this area.

The EBA will continue monitoring some specific aspects, following the publication of its IRRBB Heatmap in January 2024.