LONDON, Jan 24 (Reuters) – Banks in the European Union
face closer scrutiny of how they assess the impact of interest
rate changes on their balance sheets after an initial
examination uncovered a patchwork of approaches, the bloc’s
banking watchdog said on Wednesday.
The European Banking Authority (EBA) last year discussed
with banks how they apply a rule known as interest rate risk in
the banking book or IRRBB written by the global Basel Committee.
Basel has begun considering tweaks to the IRRBB, such as
requiring banks to take into account bigger potential rate
shocks in their calculations, and EBA’s findings will feed into
this work.
Under IRRBB, banks have to assess the impact of different
interest rate ‘shocks’ in each currency they are materially
exposed to.
“Due to the variety of models implemented by institutions,
additional support might be required for both regulators and
supervisors to better understand how the IRRBB risks are
assessed and covered,” EBA said in a report on Wednesday.
The aim is to check if banks are making justified
assumptions and judgements in their modelling, especially after
sharp rises in central bank rates over the past two years, and
what hedging strategies they use.
“The transmission of these higher interest rates to the real
economy may not have yet fully materialised,” John Schindler,
secretary general of the G20’s Financial Stability Board, which
includes the Basel Committee as a member, said this week.
“Therefore there is still the risk of rising debt service
and other challenges to come.”
After the initial stock-take last year, EBA will now
undertake deep dives this year and next into specific elements
of IRRBB, in particular how rate risks affect so-called net
interest income of banks.
This refers to the difference between the money banks earn
from interest-bearing assets such as loans and mortgages, and
expenses from paying interest on savings accounts.
It is the latest sign of how regulators are checking the
impact of the end to cheap money on different parts of the
financial system.
(Reporting by Huw Jones; Editing by Jan Harvey)
