ZBB 2021, 57

RWS Verlag Kommunikationsforum GmbH & Co. KG, Köln RWS Verlag Kommunikationsforum GmbH & Co. KG, Köln 2199-1715 Zeitschrift für Bankrecht und Bankwirtschaft ZBB 2021 AufsätzeMarc Wambold* / Axel Wieandt**

Interest rate risk in the banking book – is the SSM’s regulatory approach tight enough?

The current low interest rate environment is an unprecedented situation for the European banking union’s single supervisory mechanism (SSM) in that it increases interest rate risk in the banking book (IRRBB) for euro area banks. Sudden upward movements in rates threaten the economic value of bank equity, and persistently high interest rates can lead to lower bank earnings. These risks point to the need for a comprehensive supervisory approach to regulating IRRBB. Given the extraordinary circumstances and high levels of IRRBB which banks are and will be exposed to, we evaluate whether the SSM’s regulatory approach is tight enough. Specifically, we assess the adequacy of the supervisory outlier tests by performing an empirical analysis on historical interest rate changes and discussing whether the earnings perspective should be included in the supervisory outlier tests. Furthermore, we consider the minimum capital requirements for IRRBB against the background of the current low interest rates.
Overall, we conclude that the current SSM’s approach on IRRBB is not tight enough. While we confirm the adequacy of the existing supervisory outlier tests, we recommend complementing them with outlier tests regarding the net interest income of banks. We further recommend implementing a standardised approach for calculating minimum capital requirements to improve banks’ resilience against IRRBB.1
ZBB 2021, 58

Contents

  • I. Introduction
  • II. Interest rate risk – a literature review
    • 1. Definition of interest rate risk
    • 2. Measuring IRRBB
    • 3. Managing IRRBB
  • III. The SSM’s approach to measuring IRRBB
    • 1. BCBS – International regulation on IRRBB
    • 2. EBA – SSM regulation on IRRBB
  • IV. Adequacy of the supervisory outlier tests
    • 1. Appropriateness of the interest rate shocks
      • 1.1 Descriptive and historical simulation analysis of the daily-observed changes of the interest rate curve
      • 1.2 Linear regression analysis to simulate interest rate changes
    • 2. Supervisory outlier tests under the earnings perspective
  • V. Minimum capital requirements for IRRBB
  • VI. Conclusion
*
*)
JST Supervisor, Deutsche Bundesbank, Frankfurt/M.
**
**)
Dr. rer. pol., Honorarprofessor WHU Otto-Beisheim School of Management, Adjunct Professor Finance Kellogg Graduate School of Management and Lecturer Goethe Business School, Königstein i. Ts.
The views expressed in this paper are those of the authors and do not necessarily reflect the opinion of the Deutsche Bundesbank or the Eurosystem.
1
1)
The authors thank an anonymous referee and Professor Frank Altrock for valuable comments and suggestions.

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