MNI: Interest Rate Risk is Well Managed in Most EU Banks - ECB

By Christian Vits

     FRANKFURT (MNI) - Interest rate risk is well managed in most banks across

Europe, the European Central Bank said in its latest banking stress test.

     "Higher interest rates would lead to higher net interest income in the next

three years for most of the banks directly supervised by the ECB, but to lower

economic value of equity", according to the results of the 2017 ECB stress test,

published Monday.

     The ECB conducted a sensitivity analysis of interest rate risk in the

banking books based on year-end 2016 numbers. The results were used in the

yearly assessment of the banks' overall capital demand.

     The ECB applied six hypothetical interest rate shocks to determine how the

economic value of equity and net interest income projections would change in an

evolving interest rate environment. The six shocks drew on the ones set by the

Basel Committee on Banking Supervision and captured changes in the level and

shape of the interest rate curve, the ECB said.

     The shocks were hypothetical and not modelled as projections for the

development of interest rates in the euro area.

     "A hypothetical increase in interest rates of 200 basis points would lead

on aggregate to a rise in net interest income of 4.1 percent in 2017 and of 10.5

percent by 2019, while the economic value of equity would decrease on aggregate

by 2.7 percent," the bank said.

     "Should interest rates stay at their end-2016 level and absent any credit

growth, the aggregate net interest income would however decrease by 7.5

percent." 

     These projections are strongly influenced by the assumptions banks make

about their customers' behaviour, the ECB added. For example, under a rising

rates scenario, the stickiness of retail deposits constitutes a crucial

assumption for the increase in net interest income to take place.

--MNI Frankfurt Bureau; +49 69 97782671; email: christian.vits@marketnews.com

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