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Financial Instruments: Interest Margin Hedging

Date recorded:

The IASB held an educational session on financial instruments where three representatives of the European Banking Federation (FBE) presented an alternative hedge accounting model.

The European banking industry has said that the IAS 39 fair value hedge accounting model does not adequately accommodate portfolio hedging of interest rate risk done by some banks. As a result of this the FBE has developed an interest margin hedging (IMH) model, which is an alternative to the IAS 39 model developed by the IASB and that the FBE believes better reports the underlying risks that banks are managing.

The objective of the IMH model is to reduce volatility in interest margins arising from the interaction of interest income and interest expense. The FBE view is that these interest margins will only be at risk when there is an asset/liability mismatch (that is, when the assets and the liabilities do not have the same repricing dates) in combination with a variable rate asset and a fixed rate liability (or vice versa). The IMH model has two intentions:

  • To reduce interest margin volatility by securing today's interest rate levels for existing floating rate items, and
  • To reduce interest margin volatility on future transactions that are done to fill the asset/liability mismatch.

The FBE believes this model will align 'state of the art' interest risk management and consideration of core deposits as an integral part with hedge accounting.

The session included a debate where the Board asked questions to get a better understanding of the proposed model. Thereafter, Board members stated that they did not think the proposal would require changes to what is currently allowed for hedging purposes under IAS 39. The meeting then discussed several specific paragraphs in the Implementation Guidance of IAS 39 that the FBE had addressed as a problem.

The Board did not take any specific decisions on the IMH model at this meeting, but asked the FBE to address those paragraphs that it had identified as problematic by proposing revised wording to the IASB.

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