New EBA Guidelines on IRRBB Set to Impact UK Banking Recruitment

In October of 2022, The European Banking Authority (EBA) released a final set of Guidelines and two draft Regulatory Technical Standards (RTS) regarding interest rate risk arising from non-trading book activities. These regulatory products complete the onboarding into EU law of the Basel standards on IRRBB, and are crucial given the current interest rate environment.

The Guidelines on IRRBB and credit spread risk arising from non-trading book activities (CSRBB) will replace the current Guidelines on technical aspects of the management of interest rate risk arising from non-trading activities under the supervisory review process (SREP) published in 2018. The updated Guidelines include new aspects, particularly the criteria to identify non-satisfactory internal models for IRRBB management and those to assess and monitor CSRBB. The EBA will closely scrutinise specific aspects of the Guidelines, including the 5-year repricing maturity cap of non-maturity deposits and the repricing approaches used in business lines and products. These Guidelines will apply from 30 June 2023, except for the part on CSRBB, which will apply from 31 December 2023.

The final draft RTS on the IRRBB standardised approach specifies the criteria to evaluate the risks arising from potential changes in interest rates that affect both the economic value of equity (EVE) and the net interest income (NII) of an institution’s non-trading book activities. They will also provide a simplified standardised approach for smaller and non-complex institutions. The final draft RTS include adjusted thresholds for modelling behavioural assumptions to be used in combination with standardised constraints and assumptions.

The final draft RTS on IRRBB supervisory outlier tests (SOT) specify the modelling and parametric assumptions and the supervisory shock scenarios to identify institutions for which the EVE would decline by more than 15% of Tier 1 capital, as well as to evaluate if there is a large decline in the net interest income, that could trigger supervisory measures.

The EBA will closely monitor the implementation of these Guidelines and RTS, as well as the impact of evolving interest rates on the management of IRRBB by EU institutions and other related prudential aspects. The updated IRRBB framework for the EU, including some mandates attributed to the EBA, has been developed using the 2016 IRRBB Basel standards as a starting point.

One of the key implications of the new guidelines is that banks will need to invest in technology and systems to help them manage interest rate risk more effectively. This is likely to lead to an increased demand for skilled professionals with experience in risk management, financial modelling, and data analytics. Banks will also need to recruit staff with experience in implementing and maintaining technology systems, such as risk management software, to ensure compliance with the new regulations.

The updated guidelines also introduce new criteria for identifying non-satisfactory internal models for managing interest rate risk and for assessing and monitoring credit spread risk. This will require banks to ensure that their internal risk models are up-to-date and accurate, and will likely lead to a need for additional expertise in areas such as quantitative analysis, financial modelling, and risk assessment.

In addition to these technical requirements, the new regulations will also require banks to adopt a more strategic approach to managing interest rate risk. This will involve a greater focus on business planning and forecasting and will require banks to recruit staff with experience in financial planning and analysis, strategic planning, and business development.

Overall, the new guidelines are likely to have a significant impact on the recruitment market in the UK banking sector, with an increased demand for skilled professionals in a range of areas related to risk management, financial modelling, data analytics, and business strategy. Banks will need to invest in technology and systems to ensure compliance with the new regulations, and will need to recruit staff with the necessary expertise to implement and maintain these systems. The recruitment market is likely to be competitive, with banks competing for a limited pool of skilled professionals with the required experience and expertise.

The regulatory requirements around IRRBB management are complex, and the EBA's recent publication of final standards and guidelines on the subject is a reminder that banks must ensure they have the necessary expertise to manage interest rate risk effectively. However, there is a well-documented skills shortage in this area, and banks are facing challenges in finding qualified professionals to manage IRRBB.

To address this challenge, banks can take a range of measures, including

• Investing in training and development programs: Banks can develop their existing staff members by offering training and development programs that provide them with the knowledge and skills required to manage IRRBB. These programs can be tailored to the needs of the individual and may include on-the-job training, mentoring, and coaching.
• Partnering with educational institutions: Banks can partner with universities and other educational institutions to create bespoke training programs that meet their specific needs. This can include offering internships, work placements, and apprenticeships, as well as collaborating with academic institutions to develop courses that are relevant to the banking industry.
• Offering competitive remuneration packages: Banks can attract and retain skilled professionals by offering competitive remuneration packages that include not just financial incentives but also opportunities for career development and progression.
• In addition to these measures, employers may also consider recruiting candidates with transferable skills that can be applied to IRRBB management. Some transferable skills that may be useful in this context include:
• Analytical skills: Candidates with a strong background in mathematics, statistics, or data analysis may be well-suited to IRRBB management roles, as they will have the ability to understand and interpret complex data sets.
• Risk management skills: Candidates with experience in risk management may have skills that are transferable to IRRBB management, as they will have a good understanding of risk frameworks and methodologies.
• Project management skills: Candidates with strong project management skills may be well suited to IRRBB management roles, as they will have the ability to manage complex projects and coordinate multiple stakeholders.

Overall, addressing the skills shortage in IRRBB management will require a concerted effort from banks, educational institutions, and policymakers. By investing in training and development programs, partnering with educational institutions, and offering competitive remuneration packages, banks can attract and retain the skilled professionals they need to manage interest rate risk effectively. Employers may also consider recruiting candidates with transferable skills that can be applied to IRRBB management, such as analytical, risk management, and project management skills.