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Interest rate risk in the banking book – is the SSM’s regulatory approach tight enough?

Author

Listed:
  • Wambold Marc

    (JST Supervisor, Deutsche Bundesbank, Frankfurt/M.)

  • Wieandt Axel

    (Dr. rer. pol., Honorarprofessor WHU Otto-Beisheim School of Management, Adjunct Professor Finance Kellogg Graduate School of Management and Lecturer Goethe Business School, Königstein i. Ts. The views expressed in this paper are those of the authors and do not necessarily reflect the opinion of the Deutsche Bundesbank or the Eurosystem.)

Abstract

The current low interest rate environment is an unprecedented situation for the European banking union’s single supervisory mechanism (SSM) in that it increases interest rate risk in the banking book (IRRBB) for euro area banks. Sudden upward movements in rates threaten the economic value of bank equity, and persistently high interest rates can lead to lower bank earnings. These risks point to the need for a comprehensive supervisory approach to regulating IRRBB. Given the extraordinary circumstances and high levels of IRRBB which banks are and will be exposed to, we evaluate whether the SSM’s regulatory approach is tight enough. Specifically, we assess the adequacy of the supervisory outlier tests by performing an empirical analysis on historical interest rate changes and discussing whether the earnings perspective should be included in the supervisory outlier tests. Furthermore, we consider the minimum capital requirements for IRRBB against the background of the current low interest rates.

Suggested Citation

  • Wambold Marc & Wieandt Axel, 2021. "Interest rate risk in the banking book – is the SSM’s regulatory approach tight enough?," Zeitschrift für Bankrecht und Bankwirtschaft (ZBB) / Journal of Banking Law and Banking (JBB), RWS Verlag, vol. 33(1), pages 57-70, February.
    • Handle: RePEc:bpj:zfbrbw:v:33:y:2021:i:1:p:57-70:n:1
    DOI: 10.15375/zbb-2021-0107
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