On 20 October 2022, the European Banking Authority (EBA) published a new set of guidelines and two final draft Regulatory Technical Standards (RTS) specifying technical aspects of the revised framework capturing interest rate risks for banking book (IRRBB) positions.

The new guidelines and draft RTS complete the onboarding into EU law of the Basel standards of IRRBB and are of crucial importance given the current interest rate environment. They have been developed on the basis of Articles 84(5), 84(6) and 98(5a) of the Capital Requirements Directive V.

Draft RTS on the IRRBB standard approach (SA)

The draft RTS specify a set of procedural aspects and applicable assumptions related to both the SA on Economic Value of Equity (EVE) and SA on Net Interest Income (NII), as well as for the respective simplified standardised approaches.

In summary, EVE is the discounted sum of all future cash flows, assuming a run-off balance sheet (which avoids the complexity of determining the applicable interest rates for the renewal of exposures). In contrast, NII is the forward-looking projection of interest income (and expenses) over a pre-defined time horizon (e.g., of up to one, two or three years). While both are based on notional repricing cash flows (interest payments or principal amounts of fixed rate instruments that mature or principal amounts of floating rate instruments that reprice) under EVE they are discounted to the present and under NII they are projected to the end of the NII horizon.

Draft RTS on IRRBB supervisory outlier tests (SOT)

The draft RTS specify the supervisory shock scenarios and modelling and parametric assumptions for the SOT on EVE and the SOT on NII as well as to provide a definition and calibration of the large decline for the SOT on NII.

Both sets of draft RTS will be submitted to the European Commission for endorsement following which they will be subject to scrutiny by the European Parliament and the Council before being published in the Official Journal of the European Union.

Guidelines on IRRBB and credit spread risk arising from non-trading activities (CSRBB)

The new guidelines will replace the current 2018 guidelines on technical aspects of the management of interest rate risk arising from non-trading activities under the supervisory review and evaluation process (SREP). The new guidelines maintain continuity with the 2018 guidelines as far as possible, while updating some elements, particularly the criteria to identify non-satisfactory internal models for IRRBB management and those to assess and monitor CSRBB.

In summary, the new guidelines provide the legal framework for institutions’ IRRBB internal systems and for the SOT calculations if not specified in the relevant RTS on SOT. The guidelines are also applicable, as regards the identification, management and mitigation of IRRBB, in case the internal systems are replaced by the use of the IRRBB SA, in which case the RTS on SA provide the necessary specifications for IRRBB evaluation aspects as well as for the purposes of SOT calculations if not specified in the RTS on SOT. The guidelines also provide the legal framework for assessing and monitoring CSRBB.

The guidelines will be translated into the official EU languages and published on the EBA website.  The deadline for Member State competent authorities to report whether they comply with the guidelines will be two months after the publication of the translations. Upon publication of the guidelines, the

2018 guidelines are repealed and replaced.

The guidelines will apply from 30 June 2023, except for the part on CSRBB, which will apply from 31 December 2023.