In October 2022 the European Banking Authority (EBA) announced new reforms for interest rate risks for banking book (IRRBB) and credit spread risk in the banking book (CSRBB). In doing so, it updated the 2018 guidance and included a mandatory element to the previously advisory guidelines. The regulations now include standard models for Economic Value of Equity (EVE) and Net Interest Income (NII) with implementation deadlines of December 2023 for CSRBB and June 2024 for IRRBB. In addition to the regulatory reforms, we can see from the current economic climate how vital both robust interest rate risk and liquidity risk management are.
The challenges of meeting new regulations for IRRBB
In 2008, in response to the global financial crisis, liquidity risk regulations were introduced under Basel, with banks required to calculate and report Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). Corresponding Interest Rate Risk measures (IRRBB) were only ever given as guidelines. Now IRRBB guidelines will be brought into the regulatory realm and banks will need to submit mandatory EBA IRRBB disclosures templates.
Up until this point there has not been a standardized model for computing EVE or NII and banks have been able to rely on their own internal models. These EBA models are not yet fully replacing the internal models in place for all banks, but they can be demanded by supervisors if internal models are not considered to be sufficient.
The EBA is expected to closely monitor the implementation of these new regulations. This will be particularly important in the current environment of rising interest rising rates, alongside high inflation, after a long period of historically low rates.
And, for the first time, CRSBB will need to be identified and dealt with as a separate risk category from IRRBB.