03/28/2024 | Press release | Distributed by Public on 03/28/2024 00:12
The FIN-FSA carried out a thematic review examining how credit institutions under the FIN-FSA's direct supervision comply with the EBA's updated interest rate risk regulation published in October 20221 in terms of the measurement of interest rate risk and management of related models. The thematic review survey consisted of three areas:
The thematic review showed that the measurement of interest rate risk and management of both measurement methods and models by credit institutions under the FIN-FSA's direct supervision need development to achieve compliance with the requirements of the EBA Guidelines and the standards specified below. There were shortcomings both in the credit institutions' own methods, supervisory outlier tests and particularly in the management of the measurement methods and models. Shortcomings concerning the measurement methods and models combined with their incomplete management give grounds for questioning the reliability of the results presented by the credit institutions on their interest rate risk measurements.
It is noteworthy that the delegated act on the standards specified below has not been published yet. However, the regulation has in many respects been the same as in the earlier version of the EBA Guidelines that entered into force on 30 June 2019.
In the thematic review, the following shortcomings were identified:
The FIN-FSA will review the credit institution-specific findings and recommendations together with each credit institution that participated in the thematic review.
In the measurement of interest rate risk, credit institutions may use either their own models or the standardised method (small and non-complex institutions may also use the simplified standardised approach). In addition, all credit institutions must measure interest rate risk by supervisory outlier tests under the RTS. The thematic review comprised an assessment of the credit institution's own methods or the standardised method, if the credit institution applies it, and the supervisory outlier tests.
The starting point for the supervisory outlier tests and the standardised method is that the credit institution must apply standardised assumptions even where its own method is more comprehensive, conservative, or better applicable to the credit institution's strategy. The purpose of standardised assumptions is to improve the comparability of different credit institutions.
However, credit institutions should not merely rely on the supervisory outlier tests, as they should also develop their own interest rate measurement methods. These own methods must be based on the credit institution's specific situation and account for all interest rate risk components involved in its financing activities. The assumptions must be consistent with the business strategies, and they must be tested and validated on a regular basis.
Marjo Risku, Chief Specialist, telephone +358 9 183 5275 or marjo.risku(at)fiva.fi
1The regulatory package included: guidelines on interest rate risk (IRRBB) and credit spread risk (CSRBB) arising from non-trading book activities, a draft RTS on the IRRBB standardised and simplified-standardised approaches and a draft RTS on the supervisory outlier tests (SOT)