Interest Rate Risk in the Banking Book: 2017 Deloitte Survey

Following the publication in June 2016 of the new Standards on Interest-Rate Risk in the Banking-Book (IRRBB) by the Basel Committee on Banking Supervision, the Deloitte EMEA IRRBB/ALM working group invited European and South African banks to participate to an online survey to assess their current state of readiness against the new Basel standards.

Thirty-seven banking groups, from 10 different EMEA countries, have responded to the survey. The most important results of the survey have been highlighted in a brochure you can download. It will be followed by a white paper which will be published in the upcoming weeks.

The survey is very timely, as the European Central Bank launched its 2017 stress-testing exercise on 28 February 2017, focusing on IRRBB.

The survey, which was undertaken between September and December 2016 across 9 European countries and in South Africa, involved 37 leading banking groups of different sizes (with balance sheets ranging from € 30bn to € 500bn) and types (retail, cooperative, private, investment, commercial and universal banks). The survey focused on the assessment of the banks’ current state practices against the new IRRBB framework provided by the BCBS with six detailed sections and more than 80 specific questions on ALM and IRRBB practices.

Key enhancements

• Enhanced disclosure requirements, including the impact of interest rate shocks on the change in economic
  value of equity (ΔEVE) and net interest income (ΔNII) based on prescribed scenarios, in order to promote
  greater consistency, transparency and comparability in the measurement and management of IRRBB.
• More extensive guidance on expectations for a bank's IRRBB management framework such as: development
  of interest rate shock scenarios, consideration of behavioural and modelling assumptions, credit
  spread risk measurement, IRRBB Risk Appetite setting for both economic value and earnings, IRRBB inclusion
  in the ICAAP by taking account of changes in the economic value of equity and in net interest income.
• Definition of a standardised framework to enhance risk capture and promote the use of common
  concepts: supervisors can require banks to implement the standardised approach as a fall-back (e.g.
  if they find that a bank does not adequately capture IRRBB). Alternatively, banks can adopt it voluntarily.
• Updated supervisory process in terms of factors which supervisors should consider when assessing a
  bank’s level and management of IRRBB exposures.
• Stricter threshold for identifying outlier banks which has been reduced from 20% of a bank's total capital
  to 15% of a bank's Tier 1 capital. Supervisors may implement additional tests and must publish criteria
  for identifying outlier banks.