Interest Rate Risk to play key role for 2018 Stress Tests, updated 2018 SREP and Pillar II capital

The European Banking Authority (EBA) announced it will publish consultation for amended SREP guidelines at the end of the year, to coincide with the 2018 Stress Tests. EBA’s SREP is binding for all National Supervisors across all EU member states

Particular focus is being assigned to  Interest Rate in the Banking Book (IRBB) in Pillar II, and the role the results will play in the calculation of minimum capital requirements. In 2017 the authorities have concluded that IRBB stress test will not have a direct effect on Pillar II capital but it will be taken into consideration. In 2018, EU’s banking watchdog is expected to incorporate in updated SREP and Stress Tests a direct link between IRBB results and Pillar II capital requirements.

Danièle Nouy, the head of the Single Supervisory Mechanism at the European Central Bank, told Handelsblatt in an exclusive interview that she is keeping a watchful eye on the impact that interest-rate increases could have on the balance sheets of the Continent’s banks. While higher interest rates would help improve their profits over the long term, there are concerns that it could increase financing costs in the shorter term.

While she may not expect too many bankruptcies, Ms. Nouy said she does expect banks to merge. With rules and regulations being unified across the euro zone, pan-European banks would be a “logical step,” she said. Consolidation of the banking sector is “absolutely necessary.”

Deloitte can help you assess impact in advance, to adopt commercial and banking strategy. Update internal models, risk derivatives and natural loan book hedging strategies based on maturity are just a few of the solutions that may be applicable to you and minimize the need for additional capital

Should you be interested in any of our solutions, including organising a workshop with our team, please do not hesitate to contact us.