The Capital Requirements Regulation (CRR) establishes two standard methods to compute capital requirements for general interest rate risk. Article 339 establishes the so-called maturity-based calculation for general interest risk, whilst article 340 regulates the duration-based calculation of general risk.
The duration-based method applies the concept of modified duration, defined according to the formulas in article 340(3) of the CRR. This formula is valid only for instruments not subject to prepayment risk. Accordingly, a correction to the duration becomes necessary to reflect this risk.
The European Banking Authority (EBA) has published a consultation on draft guidelines on corrections to modified duration for debt instruments. The purpose of the guidelines is to establish what type of adjustments to the modified duration have to be performed in order to appropriately reflect the effect of prepayment risk.
The deadline for comments on the consultation is 22 June 2016.
View EBA consults on draft guidelines on corrections to modified duration for debt instruments, 22 March 2016