EBA updates on the definition of a large decline of net interest income in relation to the interest rate risk in the banking book

EBA released an Opinion in response to the EC’s amendments relating to the Draft Regulatory Technical Standards specifying supervisory shock scenarios, common modelling and parametric assumptions and what constitutes a large decline for the calculation of the economic value of equity and of the net interest income in accordance with Article 98(5a) of Directive 2013/36/EU final report.
EBA confirmed its close scrutiny of the implementation of the IRRBB regulatory products and the impact of evolving interest rates on the management of IRRBB by EU institutions and other related prudential aspects. EBA suggested amendments to its initial draft RTS to address concerns expressed by the EC and EU institutions.
The Opinion proposed to retain the methodology for a large decline, as originally proposed by EBA, but to amend the level of what constitutes a large decline, replacing the original level of 2.5% of Tier 1 Capital with a level of 5% of Tier 1 Capital in view of the current rate conditions. EBA’s current scrutiny plans on IRRBB will encompass reconsideration in the short term of the level of the threshold, which might need regular updates through time. In the longer term horizon, EBA might undertake a revision of the methodology, depending on more experience to be gathered.
In addition, EBA stressed that the SOT NII should be understood as an additional metric for the supervisory review of institutions‘ exposures to IRRBB with no automaticity in the exercise of supervisory measures. Similarly, it is not expected that integrating this threshold into an institution’s internal systems would necessarily lead to mechanic recalibration actions.