ESBG sends a letter to the EBA and EC to address the proposed changes to the EBA RTS on IRRBB SOT

On 25 April, ESBG sent a letter to the European Banking Authority (EBA) and the European Commission (EC) regarding the EC proposed changes to the EBA RTS on interest rate risk in the banking book (IRRBB) supervisory outlier test (SOT), specifically for the net interest income (NII) metric. A first ESBG letter on this topic had already been submitted to these institutions in December 2022 to signal the problems with the proposed 2,5% SOT for NII threshold in light of the evolving interest rates environment.

During the adoption period, the Commission suggested introducing a new definition of “large decline” (which triggers the identification of a bank as outlier) based on two elements: 1) a ranking of banks elaborated by competent authorities, and 2) a NII decline higher than 2.5% of a bank’s Tier 1 capital.

ESBG’s letter stressed that the Commission’s suggested approach would not remediate the concerns raised by the industry regarding the calibration of the SOT NII threshold, and it would instead add more complexity, uncertainty and a lack of clarity. Instead, we recommended postponing the calibration of the SOT NII threshold to allow for a thorough analysis of the sensitivity and structural aspects of banks’ interest rate risk management and of the monetary policy developments. As an alternative, the letter recommended that the EBA sets a higher threshold to a more consistent level of 7,5% in combination with a transition period of at least 18 months.

As a result of the advocacy efforts undertaken by ESBG and other banking associations, the EBA issued an Opinion on 28 April rejecting the Commission’s approach. In particular, the Opinion proposed to retain the methodology for a large decline, as originally designed by the EBA, but to amend the level of what constitutes a large decline, replacing the original level of 2,5% of Tier 1 Capital with a level of 5% of Tier 1 Capital in view of the current rate conditions. Compared to the Commission’s proposal, the EBA solution is more realistic and in line with the industry concerns.

The new version of the RTS will still need to be adopted by the Commission, approximatively in mid-2023. The EBA current scrutiny plans on IRRBB will continue, encompassing a reconsideration in the short term of the level of the threshold, which might need regular updates through time