The financial landscape is undergoing significant changes with the introduction of new regulations impacting Interest Rate Risk in the Banking Book (IRRBB) and Credit Spread Risk in the Banking Book (CSRBB).
These changes, set to take effect from May 2024, are poised to reshape the way banks within the EU manage and report their financial risks. Ian Nelson and our Banking team explain below.
Regulatory landscape
The European Banking Authority (EBA) has published a series of amendments that supplement the implementing Regulation EU 2021/451 and Directive 2013/36/EU, also known as CRD IV. These amendments introduce new requirements for internal CSRBB management and outline the supervisory outlier testing (SOT) process that banks must undertake.
This involves determining the impact of six supervisory shock scenarios on the economic value of equity (EVE) and two scenarios on net interest income (NII).
Supervisory Outlier Testing
The SOT process, which was published in December 2023 and will be in effect from May 2024, requires banks to apply these shock scenarios to the risk-free interest rate. The scenarios are categorized into three groups: parallel shocks, short rate shocks, and rotation shocks. Banks must classify their interest rate risk as significant if the impact on EVE exceeds 15% of Tier 1 Capital or if the impact on NII is considered large.
Standard approach for Interest Rate Risk
A standardised approach for evaluating interest rate risk has also been defined, which banks must apply if required by their regulator. This approach includes detailed instructions for evaluating risk across various interest rate-sensitive asset classes and financial instruments.
Updated reporting requirements
With the new regulations come updated reporting requirements. Banks will need to begin reporting under the new standards starting in September 2024. The reporting templates provided by the Commission Implementing Regulation EU 2021/451 will require detailed quantitative information, including worst-case EVE/NII figures and sensitivity estimates.
Get in touch
The regulatory landscape for financial services is rapidly evolving. If you have any queries related to the new IRRBB and CSRBB regulations or need assistance with compliance, please don't hesitate to contact our team.
We offer a range of services to assist banks in navigating these regulatory updates. From benchmarking and industry insights to regulatory reporting assistance and model development, our expertise can help ensure compliance and optimal management of IRRBB and CSRBB risks.
