EBA’s new rules for ‘structural FX’ will reshape banks’ capital math and FX desks

The European Banking Authority has published final draft technical standards (RTS) that pin down how banks must treat structural foreign exchange (FX) positions under the Capital Requirements Regulation (CRR). The move tightens and harmonises rules that until now were handled differently across member states. For banks and their risk managers, the immediate effect will be clearer thresholds and methods for measuring long‑term currency exposure — and a higher chance that some existing balance sheet practices will carry heavier capital consequences.

What the EBA set out and why it matters right away

The RTS give a concrete definition of what counts as structural FX exposure and lay out the permitted ways to measure it. That sounds technical, but it matters because structural FX sits outside short‑term trading and influences the capital a bank must hold against currency risk. The new rules reduce room for national discretion and internal interpretation. The upshot: banks that have relied on looser local rules or flexible internal approaches may face higher capital charges or need to change how they hedge long‑dated currency mismatches.

How the RTS define and measure structural FX

The EBA draws a line between short‑term market exposures and structural positions tied to the banking book. Structural FX covers long‑term currency mismatches that arise from funding, long‑dated assets and liabilities, and business activities that are not part of trading. The RTS require firms to demonstrate why a position is structural and to document its drivers.

For measurement, the draft lays out a few approaches. One is a standardised measurement that uses fixed rules and look‑throughs to capture currency mismatches across the whole balance sheet. Another allows approved internal models for institutions with robust risk management and historical data, but the RTS tighten the conditions for model use and increase the transparency supervisors must see. The framework also forces more consistent treatment of items that were previously excluded or treated differently, such as foreign currency equity stakes, long‑dated loan books in foreign currency, and branches’ net positions.

The scope is broad: structural FX is to be measured at the consolidated level, with specific rules for subsidiaries and branches in different currencies. The RTS also set minimum documentation and validation steps — including stress testing and scenario analysis — that must back any model‑based approach. In plain terms: if you claim a position is structural, you must prove it, measure it consistently and be ready to show the numbers to supervisors.

How banks’ capital ratios and supervision are likely to change

The main supervisory effect will be greater harmonisation and less tolerance for ad hoc local practices. That will push supervisors to compare banks more directly and reduce the chance that similar positions are treated differently across jurisdictions. For many banks, especially those with significant currency mismatches in the banking book, that will mean higher risk‑weighted assets (RWAs) for FX risk or a need to hold more capital buffers.

Where internal models are tightened, some banks will lose modelling privileges or face stricter validation cycles. Expect more frequent model approvals, closer scrutiny of backtesting and additional model documentation demands. Banks that relied on internal models to reduce capital for structural FX may see RWA creep unless they can meet the tougher standards quickly.

Supervisors are likely to prioritise convergence: peer reviews, common templates and targeted on‑site checks. That will create visibility — and pressure — on outliers. From an investor perspective, the immediate question is whether any bank faces a material capital shortfall that forces it to raise capital or change its business model. For many institutions, the effect will be manageable but uneven, concentrated in banks with meaningful cross‑currency funding, large foreign subsidiaries or long‑dated FX exposures.

What this means for FX desks, hedging and market liquidity

On trading floors, the RTS will shift how desks manage flow and hedging. More positions may be labelled structural and moved out of the trading book into the banking book, changing the desk’s appetite for market‑making in certain pairs. Where capital treatment becomes more punitive, banks may scale back inventory and ask clients for higher fees to compensate.

That has real market implications. Reduced dealer inventory in less liquid currency pairs could widen bid‑ask spreads and increase hedging costs for corporates and investors. Hedging strategies may tilt towards shorter tenors or use different instruments — for example, more use of forwards combined with balance‑sheet hedges — if long‑dated swaps become capital‑inefficient.

Issuers and corporates with FX exposures should expect banks to push for clearer documentation of natural currency offsets and to price hedging services accordingly. For large cross‑border banks, the changes may only nudge capital planning; for smaller or specialised players, the impact could be more disruptive.

Timing, endorsement and what comes next

Publishing the final draft RTS is the EBA’s last public step before the decision moves up the chain. The usual path is Commission endorsement followed by formal adoption and publication. After that, there is typically a transitional period to let banks adapt systems, models and disclosures. Expect supervisors to set a phased timetable with milestones for methodology changes, reporting templates and model approvals.

Practically, banks should use the transition to map exposures, upgrade reporting, and test the standard approach against their internal models. Supervisors will watch progress closely and may require interim reports or proofs of remediation work.

Analyst checklist: what to ask bank management and what to monitor

• How does management define its current structural FX exposures and where are the largest concentrations? Ask for a currency breakdown and the drivers (funding, loans, investments).
• Which measurement approach will the bank use — standardised or internal model — and what is the timeline to secure model approval if needed?
• Estimate the RWA impact: ask management for sensitivity analyses showing capital ratios under the new RTS vs current treatment.
• Has the bank run hedging cost projections under the new capital regime? Will hedging tenor or instrument mix change?
• What IT, data and reporting upgrades are required, and what are the expected one‑off and recurring costs?
• Which subsidiaries or business lines are most exposed to supervisory reclassification or capital creep?
• Monitor quarterly disclosures: net structural FX positions, RWA for FX risk, model approvals and any supervisor letters or remediation plans.
• For trading desks, watch changes in market‑making inventory and bid‑ask spreads in less liquid pairs as early market signals.

Taken together, the RTS are a clear push toward a single, stricter rulebook for structural FX. For analysts and risk managers, the next months are about testing assumptions and quantifying impacts. Some banks will absorb the changes; others will need capital actions or strategic shifts. Either way, currency exposure will no longer be a quiet line item — it will be a visible part of capital conversations.

Sources

• eba.europa.eu