The new supervisory outlier test (SOT) on net interest income (NII): empirical evidence from a sample of Italian banks

Abstract

This paper contributes to prior literature and to the current debate concerning the prudential supervisory framework to measure interest rate risk in the banking book (IRRBB), which has been significantly changed on April 2016, when the Basel Committee on Banking Supervision (BCBS) published the latest update of its measurement standards. The consultation launched by the European Banking Authority (EBA) on December 2021, aiming at introducing the supervisory outlier test (SOT) on net interest income (NII), presents several issues and policy implications which could influence in the next future banks' asset and liability management strategies, their internal control systems, risk policies and procedures. By analyzing a sample of 28 Italian commercial banks at the end of 2021, representing more than 70% of Italian baking system’s total assets , we observe that the thresholds proposed by the EBA appear very strict and significantly depend on: i) the sample considered, ii) the lower bound applied to interest rates in the downward scenarios and iii) the current level of interest rates term structure. Our results suggest that the proposed values should be considered with caution as it seems that their potential impacts have not been thoroughly assessed. Further analyses are therefore necessary to guarantee greater robustness of the methodology used for the calibration of the thresholds, taking also into account a wider sample of banks and longer time series, as well as the correlation between the two approaches.