Banks within the European Union go on to face much closer scrutiny of how they go on to evaluate the impact of interest rate changes when it comes to their balance sheets after one of the initial examinations went on to uncover a patchwork of approaches, remarked the bloc’s banking watchdog on January 24.
The European Banking Authority- EBA in 2023 went on to discuss with banks as to how they apply a rule termed as interest rate risk in the banking book, or IRRBB, as written by the global Basel Committee.
It is well to be noted that Basel has started to consider tweaks to the IRRBB, opening a new tab, like requiring banks to take into consideration bigger potential rate shocks within their calculations, and EBA’s findings will go on to feed into this work.
Within IRRBB, banks have to evaluate the effect of different interest rate shocks on each currency they are actually exposed to.
As per the statement by EBA on January 24, because of the variety of models that are executed by institutions, additional support may as well be required for both regulators as well as supervisors so as to better understand how IRRBB risks can be assessed and even covered.
The idea is to check if the banks are making justified assumptions as well as judgments when it comes to their modelling, specifically post a sharp rise in central bank rates in the past two years, and what hedging strategies they go on to use.
According to the secretary general of the G20’s Financial Stability Board, which also happens to be including Basel Committee as a member, said that the transmission of these higher interest rates to the real economy may not as well have fully materialized yet.
And hence, there still happens to be the risk of increasing debt service as well as other challenges to come. Post the initial stock-take in 2023, EBA will now go on to undertake deep dives in 2023 as well, and next within the specific elements of IRRBB, especially how rate risks go on to affect the so-called bank’s net interest income.
This thereby refers to the difference that happens to be between what the money banks earn from interest-bearing assets like loans as well as mortgages and expenses by way of paying interest on savings accounts.
It is thereby the most updated sign of how regulators happen to be checking the actual effect of the end to cheap money on varied parts of the financial system.
