EBA · 2023_6762 Rejected question

ASF carrying amount of hedge accounted fixed rate debt securities

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
428c, para. 1
Topic
Supervisory reporting - Liquidity (LCR, NSFR, AMM)
Submitted by
Credit institution
Submitted
2023-03-29
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Question

According to the instructions of Annex XIII to Regulation (EU) No 2021/451, debt securities should be reported in C 81.00 based on their carrying amount (its book value). When the fair value hedge accounting is applied to fixed rate debt securities, the carrying amount is composed of principal, amortized cost and gain or loss reflecting the fair value of the hedged part of the liability. If rates have moved up, the carrying amount reduces and as consequence there is less available stable funding. This must be wrong, as rate changes do not increase nor reduce the bank’s available funding, but at maturity the carrying amount always equals the redemption amount. Should the fair value change for the hedge accounted funding, be ignored or reported separately on some cell where ASF would not decrease?

Background

Bank 1 is issuing floating rate bonds. Bank 2 is issuing similar fixed rate bonds, and hedges the interest rate risk with interest rate swap. Bank 2 uses hedge accounting, and the book value for bond includes nominal value of the bond and the valuation of the interest rate move. The derivatives include also the valuation of the interest rate move, but offsetting and on other side of the balance sheet. The cash flows for Bank 2 match exactly the ones with Bank1. Should these banks have the same amount of available stable funding? According to current instructions this is not obvious.
No answer published yet.

Original source: European Banking Authority, Q&A ID 2023_6762

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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