Question ID:
2019_4448
Legal Act:
Directive 2013/36/EU as amended by Directive (EU) 2019/878 – CRD5
Topic:
Other topics
Article:
84
COM Delegated or Implementing Acts/RTS/ITS/GLs:
EBA/GL/2015/08 - Guidelines on the management of interest rate risk arising from non-trading activities
Article/Paragraph:
113
Type of submitter:
Credit institution
Subject Matter:
IRRBB Application of the sudden parallel
Question:

How should banks apply the sudden parallel +-200 basis points shift of the yield curve in their forecast yield curve?

Background on the question:

The European Banking Authority (EBA) has updated its Guidelines on the management of interest rate risk arising from non-trading activities, which were published on 22 May 2015.

 

Paragraph 113 of the Guidelines on the management of interest rate risk arising from non-trading activities (EBA/GL/2018/02).

 

Per guideline 113 (EBA/GL/2018/02) banks will discount the cashflows on both the actual curve and the curve with +- 200 basis points shift, for the calculation of the impact on their EVE of a sudden parallel +- 200 basis points shift of the yield curve. The impact is the delta of both calculations.

 

As described in guideline 115d. (EBA/GL/2018/02) behavioural options should be reflected in the calculation. Client behaviour of prepayments is interest rate sensitive and banks use internal forecasts of the yield curve to predict prepayment cashflows. The question focuses on the use of the forecast of the yield curve that is required for reflecting client behavior. The guidelines impose an instant shock to the spot yield curve, but no specific guidance is given on how banks should apply the parallel shift to their forecasted yield curve n years ahead?

 

We determined 4 applications. Please refer to the attached file for descriptions.

 

The different applications could be one of the following methods:

 

Different applications for the use of the forecasted yield curve in generating interest rate dependent cash flows (for example prepayment)

 

 

Application 1

Application 2

Application 3

Application 4

Calculations with current yield curve (base scenario)

Current yield curve kept constant

Bank’s forecast curve

Bank’s forecast curve

Forward curve

Calculations with shift +- 200 bp (upward/downward scenario)

Shift +- 200 bp kept constant

Shift +- 200 bp kept constant

Bank’s forecast curve + shift +- 200 bp

Forward curve + shift

+- 200bp

 

Substantiation and visualisation per application

 

Application 1

The base scenario does not take the forecast yield curve into account. The upward/downward scenario shifts the yield curve and is kept constant.

 

 

Application 2

The base scenario will be calculated on the regular assumptions including a forecast of the yield curve as determined by the macro-economic desk of the bank. The upward/downward shift scenario will be kept constant.

 

 

Application 3

The base scenario will be calculated on the regular assumptions including a forecast of the yield curve. The upward/downward shift scenario will also include the internal forecast of the yield curve.

 

 

Application 4

The base scenario will be calculated based on the implied forward rate. The

upward/downward shift scenario are applied to the yield curve, and afterwards implied forward rates are derived based on the shocked yield curves.

Date of submission:
04/01/2019
Published as Final Q&A:
15/11/2019
EBA Answer:

For the purposes of EVE calculation of products with interest rate path dependent future cash-flows, the application of implied forward rate (application 4) is accepted from the institutions. It is one possible solution that is theoretically suitable within the supervisory outlier test framework, envisaged in paragraphs 113 to 116 of the Guidelines on the management of interest rate risk arising from non-trading activities (EBA/GL/2018/02), and it also supports the comparability between institutions.

The forward rates of the shift scenarios should be obtained by the application of the upward/downward shift scenarios on the spot rates and calculating afterwards the forward rates from the post-shock spot rates. Any required maturity-dependent post-shock interest rate floor should be respected in the application of a downward shift scenario on the post-shock spot rates.

The institutions can also use advanced methods (i.e. simulations or closed-formulas) to determine the present value of certain products if they use the supervisory scenarios as inputs of the current yield curve. Other possible solutions could be suitable where they are compatible with the EBA IRRBB Guidelines. Outcomes from internally generated methods should however be compatible with the implied rates from supervisory scenarios.

Status:
Final Q&A
Managers uploads: