The Capital Requirements Regulation (CRR) establishes two standardised methods to compute capital requirements for general interest rate risk. One is the so-called maturity-based calculation for general interest risk, while the other one is the duration-based calculation of general risk.
These draft Guidelines are relevant for institutions applying the duration-based calculation, and propose two approaches to correct the modified duration calculation.
The first approach treats the instrument with embedded optionality as if it were a combination of a plain vanilla bond and an option whilst the second approach proposes to calculate directly the change in value of the whole instrument subject to prepayment risk.
The Guidelines also propose to compute additional adjustments to reflect the negative convexity as well as transaction costs and any relevant behavioural factors that may affect the modified duration of the instrument.
Responses to this consultation can be sent to the European Banking Authority (EBA) by 22 June 2016. A public hearing will take place at the EBA premises on 25 April 2016 from 15:00 to 17:00 UK time.
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