The European Banking Authority (EBA) has updated its Guidelines on the management of interest rate risk arising from non-trading activities, which were published on 22 May 2015.

Paragraph 113 of the Guidelines on the management of interest rate risk arising from non-trading activities (EBA/GL/2018/02).

Per guideline 113 (EBA/GL/2018/02) banks will discount the cashflows on both the actual curve and the curve with +- 200 basis points shift, for the calculation of the impact on their EVE of a sudden parallel +- 200 basis points shift of the yield curve. The impact is the delta of both calculations.

As described in guideline 115d. (EBA/GL/2018/02) behavioural options should be reflected in the calculation. Client behaviour of prepayments is interest rate sensitive and banks use internal forecasts of the yield curve to predict prepayment cashflows. The question focuses on the use of the forecast of the yield curve that is required for reflecting client behavior. The guidelines impose an instant shock to the spot yield curve, but no specific guidance is given on how banks should apply the parallel shift to their forecasted yield curve n years ahead?

We determined 4 applications. Please refer to the attached file for descriptions.

The different applications could be one of the following methods:

Different applications for the use of the forecasted yield curve in generating interest rate dependent cash flows (for example prepayment)

Application 1

Application 2

Application 3

Application 4

Calculations with current yield curve (base scenario)

Current yield curve kept constant

Bank’s forecast curve

Bank’s forecast curve

Forward curve

Calculations with shift +- 200 bp (upward/downward scenario)

Shift +- 200 bp kept constant

Shift +- 200 bp kept constant

Bank’s forecast curve + shift +- 200 bp

Forward curve + shift

+- 200bp

Substantiation and visualisation per application

Application 1

The base scenario does not take the forecast yield curve into account. The upward/downward scenario shifts the yield curve and is kept constant.

Application 2

The base scenario will be calculated on the regular assumptions including a forecast of the yield curve as determined by the macro-economic desk of the bank. The upward/downward shift scenario will be kept constant.

Application 3

The base scenario will be calculated on the regular assumptions including a forecast of the yield curve. The upward/downward shift scenario will also include the internal forecast of the yield curve.

Application 4

The base scenario will be calculated based on the implied forward rate. The

upward/downward shift scenario are applied to the yield curve, and afterwards implied forward rates are derived based on the shocked yield curves.