Overview of the 2022 Guidelines on Interest Rate Risk Management: Changes compared to Guidelines 2018

In July 2018, the European Banking Authority (EBA) introduced the Guidelines on the management of interest rate risk arising from non-trading book activities, referred to as the “2018 Guidelines.” To adapt to evolving market conditions and regulatory requirements, the EBA has recently published updated guidelines for 2022, which encompass various changes compared to the previous version. This blog post provides an overview of the key modifications and additions outlined in the 2022 Guidelines.

Executive Summary

The new Guidelines replace the 2018 version and include dedicated provisions on interest rate risk in the non-trading book. The objective is to align with regulatory technical standards (RTS) and address new aspects not covered previously. While ensuring continuity, the 2022 Guidelines introduce updates to certain elements to enhance risk assessment and monitoring.

Background and Rationale

The Guidelines maintain consistency with Basel standards, with additional sections elaborating on credit spread risk and non-satisfactory internal systems related to interest rate risk. Notable changes include the incorporation of prudent behavioral assumptions for non-maturity deposits, the introduction of a five-year cap on weighted average repricing maturity for specific retail and wholesale deposits, and the inclusion of criteria for identifying non-satisfactory internal systems.

Subject Matter, Scope, and Definitions

The updated Guidelines include amended definitions for key terms such as “Interest rate risk arising from non-trading book activities,” “Interest rate sensitive instruments,” and “Credit spread sensitive instruments.” Additionally, new definitions are introduced, such as “Retail,” “Transactional deposit and accounts,” “IRRBB measures,” and “CSRBB measures.”

Implementation

The original Guideline was set to be implemented by June 30, 2023, with certain sections (4.5 and 4.6) taking effect by December 31, 2023. But in July 2023 EBA published its final amending technical standards to introduce new reporting on interest rate risk in the banking book. The new date for the application of these technical standards is 30 September 2024.

Identification and Management of IRRBB

The perimeter of interest rate risk arising from non-trading book activities encompasses all interest rate sensitive instruments, including assets, liabilities, interest rate derivatives, and other off-balance sheet items. Specific provisions address the inclusion of small trading book businesses, capital identification and calculation, and internal risk policies, processes, and controls.

IRRBB Measurement Assumptions

The Guidelines emphasize the importance of understanding and documenting key behavioral and modeling assumptions. Institutions are required to evaluate risk quantification assumptions, particularly regarding interest rate options, treatment of balances and interest flows, fixed term deposits, fixed rate loans and loan commitments, and accounting practices. Additionally, diversification assumptions and pension obligations are to be considered.

Interest Rate Shock Scenarios

The interest rate shock scenarios under the IRRBB internal measurement system should be currency-specific and reflect the underlying economic characteristics. Institutions should select scenarios that align with their risk profile, taking into account sudden and gradual shifts, changes in yield curves, basis risk, prescribed interest rate shock scenarios, and supervisors’ requirements.

Non-Satisfactory IRRBB Internal Systems

Competent authorities have the power to require the use of standardized methodologies when internal systems for evaluating interest rate risks are deemed unsatisfactory. The Guidelines specify the criteria for evaluating system adequacy and provide a non-restrictive list of IRRBB measurement methods with associated limitations.

Conclusion

The 2022 Guidelines on interest rate risk management introduce several changes compared to the 2018 version. These updates aim to align with regulatory standards, enhance risk assessment and monitoring, and ensure the adequacy of internal systems. Financial institutions are encouraged to review and implement these Guidelines to maintain compliance and improve their management of interest rate risk in non-trading book activities.

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