109. Where institutions decide to adopt a policy intended to stabilise earnings arising from their …

Where institutions decide to adopt a policy intended to stabilise earnings arising from their own equity, they should:

(a) have an appropriate methodology for determining what elements of equity capital should be considered eligible for such treatment;
(b) determine what would be a prudent investment maturity profile for the eligible equity capital that balances the benefits of income stabilisation arising from taking longer-dated fixed-return positions against the additional economic value sensitivity of those positions under an interest rate stress, and the risk of earnings underperformance should rates rise;
(c) include appropriate documentation of these assumptions in their policies and procedures, and include a process for keeping them under review;
(d) understand the impact of the chosen maturity profile on the institution’s own chosen risk measurement outputs, including by regular calculation of the measures without inclusion of the equity capital to isolate the effects on both EVE and earnings perspectives; and
(e) undertake stress testing to understand the sensitivity of risk measures to changes in key assumptions for equity capital, taking the results of such tests into account in their IRRBB internal capital allocation decisions.

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