Commerzbank’s rate-shock loss sensitivity rises 33%

Bank’s liabilities modelled to reprice faster than assets in a 200bp parallel hike scenario

Commerzbank’s loss sensitivity to an upward interest rate shock widened 33% in the third quarter, a sign the bank’s liabilities were increasingly informed by yield-curve developments.

The lender modelled a €2.7 billion ($2.9 billion) drop in the present value of its end-September balance sheet should yields across all maturities instantaneously rise 200 basis points, compared with €2 billion at end-June.

 

It was the most liability sensitive Commerzbank has been since Q3 2021, when the same shock stood to produce a €2.8 billion loss in what is known as the bank’s economic value of equity (EVE).

The most recent figure equated to 9.5% of Tier 1 capital, up from little more than 7.2% at end-June. If EVE drops by an amount higher than 20% of Tier 1 capital, the bank is flagged as an outlier and can face regulatory intervention.

Sensitivity also increased in the downward scenario, albeit not to the same extent. The bank forecast a 200bp instant cut in rates to boost EVE by €1.1 billion at end-September, or 3.7% of Tier 1 capital, compared with €938 million and 3.3% at end-June.

What is it?

Interest rate risk in the banking book (IRRBB) is the risk posed by adverse movements in interest rates that cause a mismatch between the rates that banks set on customer loans and on deposits. The mismatch would subsequently bite into a bank’s net interest income, as well as affect the economic value of equity, which is derived by discounting future cash inflows and outflows.

Current European Banking Authority guidelines in place since 2019 require banks to model the change in EVE under two symmetrical 200bp shock scenarios and compare it to a baseline forecast. An updated set of guidelines, drafted in October 2022 and currently undergoing scrutiny by European Union lawmakers, subjects EVE to the same six scenarios used to test net interest income.

An EVE drop higher than 20% of Tier 1 capital in any simulation – to be lowered to 15% under the updated guidelines – can warrant closer scrutiny or remedial action by regulators, for instance in the form of higher Pillar 2 buffers. However, it does not mechanically trigger additional capital requirements.

Why it matters

A negative EVE impact from higher rates is a well-known structural feature of eurozone banks. But the latest jump in Commerzbank’s sensitivity may be testament to the sweeping rejigs undertaken by banks, in terms of both modelling and balance sheet composition.

An ebbing EVE in an upward shock scenario means that, in essence, Commerzbank’s liabilities would reprice in line with higher rates faster than its assets. Perhaps a part of these has exhausted capacity to absorb further climbs in yields. The bank may also be incorporating new assumptions about savers’ behaviour, thus driving the so-called deposit beta – the rate at which hikes in interest rates are passed to depositors – higher.

But higher liability sensitivity may also point to Commerzbank positioning for the peak of the rate-tightening cycle. Chief financial officer, Bettina Orlopp, told analysts on November 8 that the bank sees eurozone interest rates staying put for now, before declining to 3% by 2027. The bank could be making sure that, as soon as yields retreat, liabilities can reprice in line with cheaper rates, while loan income remains in the wake of current tailwinds.

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