ECB sensitivity analysis of IRRBB – stress test 2017

28 February 2017

Frequently asked questions

1. Why is ECB Banking Supervision conducting the ECB sensitivity analysis of interest rate risk in the banking book (IRRBB) – stress test 2017?

ECB Banking Supervision is required to organise annual supervisory stress tests (CRD IV, Article 100) and will conduct such an exercise for the banks under its direct supervision in 2017.

This year’s exercise is designed to provide the ECB with sufficient information to understand the interest rate sensitivity of a bank’s assets and liabilities in the banking book and net interest income. The hypothetical shocks applied in this exercise are drawn from the standards set by the Basel Committee on Banking Supervision (BCBS) in “Standards – Interest rate risk in the banking book”, published in April 2016.

2. What is the focus of the ECB sensitivity analysis of IRRBB – stress test 2017? How will you use the results?

The supervisors will examine how hypothetical changes in the interest rate environment would affect banks.

In analysing how an interest rate shock would affect banks, the exercise focuses on the changes in the economic value of the banking book assets and liabilities and on the development of net interest income generated by those assets and liabilities. The banking book covers the assets and liabilities that are not related to the banks’ trading activities. The exercise also aims to analyse how banks’ models of customer behaviour impact their interest risk measurement, as such behaviour may change in response to changes in interest rates.

The results of the exercise will feed in a non-mechanical way into the Supervisory Review and Evaluation Process (SREP) 2017, which determines how much capital a bank needs to hold. Supervisory capital demand in the 2017 SREP decision will not be determined by the quantitative results of the exercise, but informed by the relative vulnerability of the banks to the different interest rate shocks. More specifically, the results will inform the assessment of how much capital an institution needs to hold as part of Pillar 2 requirements and Pillar 2 guidance (P2G).

3. Will the exercise lead to higher supervisory capital demand for the banks?

Overall, the aggregate amount of capital demand for the banks directly supervised by the ECB is expected to be stable, all else being equal.

4. What are the assumptions for changes in the interest rate environment in this stress test?

Six different interest rate shocks will be used. These shocks are drawn from the shocks set in April 2016 by the Basel Committee on Banking Supervision (see Standards - Interest rate risk in the banking book) and will be applied to the banking book. These shocks capture various changes in the level and shape of the interest rate curve and will give the supervisors information on how the economic value of the banking book equity and the net interest income projections will change under each shock. The shocks are hypothetical and are not meant to forecast in any way the future development of interest rates in the euro area; they are rather intended to identify potential vulnerabilities in banks’ banking books.

The shocks are therefore applied more in the spirit of a sensitivity analysis. A sensitivity analysis differs significantly from a macroeconomic stress test, which typically incorporates model-based economic projections in a scenario.


yield curve IR shock

5. Which parts of banks’ balance sheets will be subject to the sensitivity analysis?

The focus is on banking book positions. For each bank, the scope is limited to assets and liabilities denominated in the major currencies for that specific bank. The exercise only covers assets and liabilities in a currency in which more than 20% of a bank’s banking book assets are denominated. It was decided not to take into account holdings in other currencies below the threshold in order to limit reporting burdens. Moreover, the outcome from such smaller holdings is unlikely to lead to significant changes in the overall results.

6. How long will the exercise last?

The exercise starts on 28 February 2017 and the results will mainly feed into the SREP assessment and will help in calibrating the Pillar 2 guidance (P2G). Results will be discussed as part of the SREP supervisory dialogue between banks and Joint Supervisory Teams (JSTs) in the summer.

In this “bottom-up” exercise, banks provide the projections for given interest rate shocks based on their own models. The results will feed into the qualitative measures and the discussions held between the JSTs and the banks in the context of the SREP.