Explanatory notes to the quarterly report on interest rate risk in the banking book

These banks must report on their interest rate risk pursuant to the 2011 Regulation on Statements of Financial Undertakings under the Financial Supervision Act (Regeling staten financiële ondernemingen Wft 2011) These standard reports enable DNB to (i) make a first assessment and (ii) perform a consistent comparison of banks’ interest rate risks.

Banks extract the reported key indicators from their internal systems. For each reporting entry, these notes briefly describe the indicator and the required reporting format.

General

1. Report all amounts in units.
   
   
2. Convert to euros at exchange rates prevailing on the reporting date.
   
   
3. Report percentages in decimals. This means that 11.25% should be reported as 0.1125 and 150% as 1.5.
   
   
4. Report all expenses, costs and losses with a minus sign. An exception to this rule is PV01, where the sign matches the sign of the duration.
   
   
5. Report each significant currency in euros. A significant currency is a currency amounting to over 5% of the total non-trading book financial assets (excluding tangible assets) or liabilities, or less than 5% if the sum of assets or liabilities included in the calculation is lower than 90% of total non-trading book financial assets (excluding tangible assets) or liabilities.
   
   
6. Information on the required templates and filing indicators can be found here.

Template R01.01

Present value of 1 basis point (PV01)
The ‘Present value of 1 basis point (PV01)’ is the change in value of equity expressed in euros resulting from a parallel change in the yield curve of 1 bp. The sign of PV01 must match the duration sign¹. A positive PV01 coincides with a positive duration, with rising interest rates resulting in a decrease of the market value of equity. A negative PV01 coincides with a negative duration, with rising interest rates resulting in an increase of the market value of equity.

R01.01 Eigen vermogen
‘Eigen vermogen’ refers to Own funds as referred to in Article 72 of the European Capital Requirements Regulation (CRR).

Template R02.01

Projected net interest income and equity in the baseline interest rate scenario

Net interest income (NII) in 1 and 2 years
‘Net interest income in 1 year’ is the expected net interest income in the baseline interest rate scenario in the 12 months after the reporting date. ‘Net interest income in 2 years’ is the expected cumulative net interest income in the baseline interest rate scenario in the 24 months after the reporting date.

In the baseline scenario, all future cash flows (principal and interest flows) are repriced at forward interest rates derived from the yield curve prevailing on the reporting date. The future development of balance sheet totals and commercial margins applied in the baseline scenario must be in line with a realistic and up-to-date business plan. A minimum requirement for the development of the balance sheet total and the commercial margin is the assumption of a constant balance sheet. In this scenario, maturing or repricing cashflows will be replaced by new instruments with comparable conditions as regards to instrument type, volume and original maturity.

Economic value of equity (EVE)
The economic value of equity in the banking book is calculated separately for each material currency as the present value of all assets in the relevant currency minus the present value of all liabilities in the relevant currency plus/minus the present value of off-balance-sheet items in the relevant currency under the interest rate conditions on the reporting date. CET1 core capital instruments and other perpetual capital with no expiry date are excluded from the calculation of EVE.

Gradual parallel shift of yield curve (NII movement)

200 bps up/down, NII movement in 1 year
These items must be used to report the impact of an upward or downward gradual parallel shift of the yield curve on net interest income. This is a 200 bps shift relative to the baseline scenario over 12 months from the reporting date. In other words, the parallel shift is applied to the forward yield curve used in the baseline scenario. In DNB’s opinion, a gradual parallel shift means that the interest rate increases or decreases to the same degree each consecutive day. This way, an interest rate change of 200 bps relative to the spot rate is effected within a period of 12 months.

200 bps up/down, NII movement in 2 years
The yield curve also gradually shifts relative to the baseline scenario over a period of 12 months. Following the parallel shift in the first year, the interest rate remains unchanged in the second year. The reported amount reflects the total impact in the 2-year period.

The two-year figures thus represent the cumulative impact on the net interest income in 2 years.

Sudden parallel shift of yield curve (change in EVE)

200 bps up/down, change in EVE
Please report the change in value of equity as a result of an upward or downward parallel shift of the yield curve of 200 bps. The yield curve shift is related to an immediate interest rate shock on the reporting date. DNB expects banks to incorporate the convexity of market value changes of instruments resulting from interest rate changes (curve convexity) in calculating the change in EVE. DNB also expects banks to account for the value changes of all options in the banking book including behavioural options (such as early mortgage repayments or withdrawal of demand deposits). Incorporation of the curve convexity as well as the market value changes of all options ensures that the convexity of the banking book is adequately reflected in this measure. Finally, DNB expects banks to apply the principles listed in section 115 of the EBA Guidelines to calculate the change in EVE.

Presentation sheet

Outlier criterion
The outlier criterion is calculated automatically in the DLR on the basis of the most negative aggregate value change of the equity (i.e. < 0) caused by an upward or downward parallel interest rate shock of 200 bps (see above). The aggregate value change is the sum of all value changes of each currency for the same interest rate shock. Positive changes are weighted by a factor of 50%. The outlier criterion is the absolute value of the quotient of the most negative value change and equity.

[1] The duration of equity in the banking book is computed as a residual item such that the average duration of the assets is equal to the average duration of the liabilities. In this equation, the durations of assets and liabilities are known and the duration of equity is unknown. When calculating the duration of equity, banks include all assets in the banking book and make no assumptions about the duration of equity.