(1)

To foster harmonisation of practices when laying out the standardised methodology for the calculation of reliable estimates of the interest rate risk in the non-trading book, it is necessary to provide institutions with the key technical elements for the evaluation of risks, including rules on the slotting of cash flows, calculations for automatic options, calculations for instruments valued at fair value, and the rules for discounting and projection of cash flows.

(2)

To ensure continuity and compliance with the relevant international standards, the definitions, elements and steps of the standardised methodology should build upon those established in the guidelines of the European Banking Authority on the management of interest rate risk arising from non-trading book activities (2) and those established in the standardised methodology of the Basel Committee on Banking Supervision of April 2016 (3).

(3)

To ensure harmonisation in identification, evaluation, management, and mitigation of interest rate risk in the non-trading book, it is appropriate to lay down standardised assumptions, where possible, in particular with regard to automatic options. When laying down such assumptions, it is necessary to take into account that professional counterparties generally trigger options to their benefit. There may be situations where prescriptive assumptions cannot be made because such assumptions could lead to risk assessments that lack accuracy, as in the case of retail client behaviour to interest rate shocks in the context of specific instruments. For those situations, it is necessary to lay down as much as possible the steps, definitions, and restrictions to estimations that institutions should have regard to.

(4)

To facilitate the implementation of the standardised methodology by institutions and having regard to the fact that both the economic value of equity and the net interest income estimations should be based on repricing cash flows, the approaches for the estimation of those two metrics should be based on the same rules regarding slotting in time buckets. However, to calculate correctly the contribution of the projected risk free interest rate to the reinvestment or refinancing of repricing cash flows, the net interest income metric requires additional slotting of cash flows into the reference term time bucket.

(5)

Furthermore, given that the instruments in scope of the calculation of the economic value of equity and net interest income have different characteristics, including fixed or floating interest rates, and embedded behavioural assumptions, and to ensure a consistent implementation of that calculation, it is necessary to consider those characteristics when laying down specific allocation rules for each type of instrument.

(6)

To strike the right balance between, on the one hand, ensuring comparability of the calculation results and, on the other hand, providing the flexibility necessary due to the long-term horizon and the inherent operational complexity, commercial margins and spread components should be included in the calculation of the net interest income. However, for the calculation of the economic value of equity, institutions should proceed in accordance with their internal management and measurement approach for interest rate risk in the non-trading book.

(7)

To enhance risk sensitivity and to take into account institution-specific conditions regarding behavioural cash flows, the assumptions underlying the cash flow slotting of non-maturity deposits, the loans subject to prepayment risk, and the term deposits subject to the risk of early redemption should primarily be based on estimations of the institutions in a way that is consistently applied over time. However, to underline the standardised nature of the methodology, the conservatism of those behavioural flows should be enhanced by the multiplication by fixed scalars depending on the applicable scenario. In addition, regarding non-maturity deposits, conservatism should be ensured by implementing standardised caps on the proportion and the average maturity of the core component, depending on the counterparty category.

(8)

To ensure proportionality in cash flow slotting, where the materiality of certain exposures falls below pre-defined thresholds institutions should be exempted from certain estimations in the context of non-maturity deposits, loans subject to prepayment risk, term deposits subject to the risk of early redemption, non-performing exposures, fixed rate retail lines, and basis risk.

(9)

To facilitate the implementation of the standardised methodology, institutions should determine the relevant rate for each repricing time bucket, or for the combination of the repricing and the reference term time bucket, instead of determining that rate for each repricing cash flow.

(10)

To determine commercial margins for the projection of new business in the calculation of net interest income and to generate up-to-date estimates, institutions should use recent observations per relevant product type, counterparty category, and geographic location. Those observations should therefore generally be based on transactions observed in the last year, or on observable market prices for the instrument with available market quotes.

(11)

The outcomes of the standardised methodology on net interest income provide the highest informational value where the net interest income time horizon is set at 1 year. However, the calculation of the interest sensitivity of net interest income over a longer time horizon can often provide additional useful information for institutions with significant concentrations of maturities around or beyond the 1-year time horizon. Against that background, and to complement the economic value of equity metric, the 1-year time horizon for the net interest income calculation should be a minimum.

(12)

Basis risk can influence net interest income in a material way. Against that background, and building on existing practice established by the European Banking Authority, it is necessary to provide for a methodology for institutions to estimate the impact of basis risk.

(13)

When laying down the simplified standardised methodology, it is necessary to ensure both proportionality and conservatism. To that end, a number of elements should be set out in that simplified standardised methodology, including certain simplifications, which provide a framework that is appropriate for the lower risk assessment capacities of small and non-complex institutions, and conservative measures which ensure the robustness of the approach. Such simplifications and conservative measures should include a prescriptive, linear slotting of non-maturity deposit cash flows, including the application of scenario-dependant scalars to the core component, and a simplified calculation of automatic optionality based on pay-outs. Moreover, for the same purpose of simplification and conservativeness, the net interest income measure should rely on a calculation of interest rates based both on an average reference term per product type and an average commercial margin per product type, and on an interest rate up to the repricing date of the instruments, calculated with estimates of average interest rates.

(14)

This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Banking Authority.

(15)

The European Banking Authority has conducted an open public consultation on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council (4),