EBA 2018 Net Interest Income Stress Test
Banks may use their own methodology and their existing ALM systems and EaR models to project their NII, relying on their assumptions regarding the pace of the repricing of their portfolio, together with their projections for risk-free reference rates and margins both under the baseline and the adverse scenarios.
The split between reference rate and margin components of banks’ assets and liabilities is introduced to distinguish two risks affecting banks’ NII under stress:
- The risk related to a change in the general ‘risk-free’ yield curves to be captured via the changes in the reference rate components of banks’ repriced assets and liabilities and off-balance-sheet short-term and long-term positions;
- The risk related to a change in the ‘premium’ that the market requires or the bank sets for different types of instruments and counterparties, reflecting the impact on credit and other market risks (e.g. liquidity).
Banks’ projections are subject to conservative constraints
- All interest-earning or interest-paying positions across all accounting categories, including not only instruments subject to amortised cost measurement but also those subject to fair value measurement (such as FVOCI positions and FVPL positions, and hedge accounting instruments), are in the scope of this section.
- Banks that, in the course of their periodic financial reporting, present the interest income on assets in FVOCI and FVPL as a part of NTI, should report this income as a part of NII and remove it from the recurring NTI in line with the provisions of paragraph 180 of this note. Only NII for these positions is within the scope of the NII methodology; the fair value impact on these positions of the stress test scenarios is captured within the market risk methodology, and the impact on the economic value of equity, as required for Pillar II analysis, is not needed. The fair value impact on derivatives not recognised for hedge accounting should continue to be recognised in the market risk templates.
- Fees and commissions that are recognised as NII in the accounting framework are also within the scope of this section. The fees and commissions that can be directly linked to loans should be stressed through the loan’s EIR. All other fee and commission income is out of the scope of the NII methodology.
First, the total interest income earned and interest expenses paid on all assets (i.e. including both performing and non-performing exposures) and liabilities are computed. Then, the interest income relating to the non-performing part of the line item is subtracted from the total. Finally, the interest income for non-performing exposures net of provisions is added back, based on the EIR applicable to NPE.
Impact on P&L
Interest on performing exposures
Under both the baseline and the adverse scenario, banks should project the interest accrued on performing exposures (including S1 and S2 exposures) in line with their standing accounting practice and the applicable EIR, projected in accordance with the methodology. The interest revenue on performing exposures is calculated on the gross carrying amount.
Interest on non-performing exposures
- Under the baseline scenario, banks are required to project the interest accrued on non-performing exposures (S3 instruments) in line with the standing accounting practice. The interest revenue is calculated on the amortised cost (gross carrying amount less credit allowance)
- Under the adverse scenario, banks are required to project income on non-performing exposures on a net basis, i.e., on the value of the exposure net of provisions, subject to a cap on the applicable effective EIR