Europe’s new IRRBB test: the riddle with no answer
A proposed compromise on net interest income test is not scientific, but exact calibration may be impossible
Financial regulation is a process of trial and error. Pull a lever too far and the system lurches out of balance. Push it back the other way and you risk overcorrecting.
In their latest rules for interest rate risk in the banking book, or IRRBB, European regulators face just such a predicament.
They have adjusted a threshold in a test meant to identify banks whose earnings from net interest margins are most at risk from shock movements in interest rates. Lenders that exceed the threshold will
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