EBA · 2017_3121 Archive

Application of the 0% floor in the calculation of the supervisory standard shock (particularly downward scenario).

Regulation
Directive 2013/36/EU (CRD)
Article
98, para. 5
Topic
Supervisory review and evaluation (SREP) and Pillar 2
Submitted by
Competent authority
Submitted
2017-01-23
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

In times of already negative interest rates, how should banks apply the 0% floor?

Background

The calculation focuses on the comparison of base scenario and -200bps scenario – if then the base scenario already incorporates negative interest rates, banks could interpret that the negative interest rate curve has to be shifted to zero. This might result in a (partially) positive shock in the downward scenario. Questions were raised during On-Site Inspections and within the scope of the ongoing su-pervisory process

Answer

According to Paragraph 24(a) of the EBA/GL/2015/08 on the management of interest rate risk arising from non-trading activities, the standard shock should be based on a sudden parallel +/- 200 basis point shift of the yield curve, applying a 0% floor. If interest rates in the base scenario are in a negative range, they should not be raised to zero when applying the -200bps/+200bps scenarios. Instead, the downward shock should be floored at the level of the current negative rate. The floor does not apply to upward shocks.

Original source: European Banking Authority, Q&A ID 2017_3121

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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