Structural hedging: accounting considerations under IFRS 9 and IAS 39

Structural hedging is an economic risk management strategy used by banks and similar institutions to manage repricing risk arising from stable funding sources and other long-dated balance sheet positions. In practice, the accounting outcome may differ from the economic hedge, particularly where the exposure being managed is behavioural, dynamically managed or not itself an eligible hedged item.

This blog summarises the key accounting considerations for structural hedging under IFRS 9 and, where relevant, the continuing use of the IAS 39 portfolio hedge of interest rate risk model. It focuses on the practical sources of accounting mismatch, hedge ineffectiveness and implementation complexity that commonly arise in bank balance sheet hedging programmes.

Executive summary

• Structural hedging is primarily an economic risk management activity. Achieving hedge accounting is a separate assessment and should not be assumed.
• Under IFRS 9, hedge accounting is available only where the qualifying criteria are met, including clear designation of an eligible hedged item and a hedged risk that is separately identifiable and reliably measurable.
• Behavioural exposures such as non-maturity deposits and internally managed equity-related positions often create the greatest accounting challenge because the economic exposure does not map neatly to an eligible accounting designation.
• For open portfolios of interest rate risk, entities may continue to apply the IAS 39 portfolio hedge accounting model, which remains relevant in practice but brings significant data, modelling and governance requirements.
• The quality of the accounting outcome depends not only on risk strategy, but also on designation discipline, basis risk management, effectiveness assessment and the robustness of systems, controls and documentation.

What structural hedging is intended to achieve

Structural hedging is typically used to manage repricing risk arising from relatively stable funding bases or other long-dated balance sheet positions. Common examples include core deposit bases, fixed-rate asset portfolios funded by non-interest-bearing balances, and internally managed positions that support target net interest income outcomes over time.

In economic terms, a bank may seek to convert part of a structurally low- or non-interest-bearing funding base into synthetic fixed-rate income typically using receive-fixed interest rate swaps. That strategy may be commercially sensible. However, the accounting analysis must focus on the designated hedged item and hedged risk, not only on the economic rationale.

This distinction is fundamental. A sound economic hedge may still produce accounting volatility if the relevant exposure cannot be designated in a qualifying hedge relationship or if the hedge is affected by basis risk, modelling limitations or operational weaknesses.

Why hedge accounting is often challenging in structural hedging programmes

Under IFRS 9, hedge accounting is designed to reflect qualifying risk management activities in the financial statements. That objective is helpful for many hedging strategies, but structural hedging programmes often involve exposures that are behavioural, open portfolio in nature, or managed dynamically over time. Those features can make the accounting designation more difficult than the economic strategy itself.

The key question is not whether the institution is economically exposed to interest rate movements; it is whether the designated hedged item and the designated hedged risk satisfy the qualifying criteria. In particular, the hedged item must be eligible, the hedged risk must be identifiable with sufficient precision, and the relationship must be capable of supporting an effectiveness assessment on an ongoing basis.

As a result, structural hedging frequently gives rise to an accounting mismatch between the risk being managed internally and the population of exposures that can be designated for hedge accounting purposes.

IFRS 9: key implications for structural hedging

IFRS 9 provides a more principle-based hedge accounting model than IAS 39 and is intended to align accounting more closely with risk management. However, that does not remove the need for discipline in defining the hedged item, the hedged risk and the method of measuring hedge effectiveness.

For structural hedging, the most important practical issue is that behavioural or internally managed exposures do not always correspond directly to an eligible hedged item. For example, an entity may manage the repricing profile of a stable deposit base or an internally determined equity-related position, yet the accounting designation must still be anchored in exposures that meet the standard’s requirements. Where that cannot be achieved cleanly, some or all of the derivative fair value movement may remain in profit or loss.

IAS 39 portfolio hedge accounting remains relevant

Although IFRS 9 replaced IAS 39 in most areas of hedge accounting, entities may continue to apply the IAS 39 portfolio hedge of interest rate risk model for macro interest rate hedging. This is important for structural hedging because open portfolios of assets and liabilities are often managed on a repricing basis rather than as static, item-by-item hedge relationships.

The IAS 39 portfolio model can therefore provide a more operationally relevant accounting solution for certain bank balance sheet hedging strategies. However, that benefit comes with material complexity, including detailed repricing schedules, robust behavioural modelling, governance over prepayment and deposit assumptions, and close control over designation and de-designation mechanics.

Accordingly, the accounting policy choice between IFRS 9 general hedge accounting and continued use of IAS 39 for qualifying portfolio hedges should be assessed carefully, with explicit consideration of the bank’s risk strategy, systems capability, modelling maturity and governance framework.

Common sources of accounting mismatch and ineffectiveness

Behavioural exposures. Stable deposits and similar balances may be managed as long-term funding from a risk perspective, but behavioural assumptions do not automatically create an eligible hedged item. The accounting challenge is therefore one of designation, measurement and evidence rather than economics alone.

Equity-related positions. Institutions may economically hedge earnings sensitivity associated with stable equity funding, but that does not mean that 'own equity' can simply be designated as a hedged item for interest rate hedge accounting purposes. Any accounting strategy needs to be framed through eligible exposures and a defensible designation approach.

Basis risk. Structural hedge programmes often involve imperfect alignment between the benchmark or repricing characteristics of the hedged exposure and those of the derivative. Differences between managed rates, administered rates and market benchmarks may not prevent hedge accounting in all cases, but they can generate hedge ineffectiveness and increase modelling complexity.

Capacity constraints. The volume of economically managed exposure may exceed the population that can be designated for hedge accounting. In those circumstances, the accounting outcome may cover only part of the hedge, with the remainder creating profit or loss volatility.

Operating model weaknesses. Even where the technical accounting position is supportable, weak documentation, poor data lineage, inconsistent modelling assumptions or inadequate control over rebalancing can undermine the accounting result.

Practical considerations for a robust accounting framework

A sustainable structural hedging framework usually requires more than technical accounting analysis. In our experience, the quality of the outcome depends on clear articulation of the risk strategy, disciplined designation of hedged items and hedging instruments, robust behavioural and valuation models, and well-controlled governance over hedge documentation and ongoing effectiveness assessment.

Management should also ensure that disclosures explain the distinction between the economic hedge and the accounting result, particularly where only part of the strategy qualifies for hedge accounting or where hedge ineffectiveness is expected as part of the operating model.

Conclusion

Structural hedging can be economically effective, but the accounting outcome depends on whether the chosen designation strategy is supportable under IFRS 9 or, where relevant, the IAS 39 portfolio hedge model. The most common execution risk is not the derivative itself; it is the gap between the way risk is managed and the way hedge accounting must be evidenced. Institutions that address that gap proactively are better placed to reduce avoidable volatility and support a more credible external reporting outcome.

How Deloitte can help

Deloitte supports clients across the design, implementation and review of structural hedging frameworks, including accounting policy assessment, hedge designation strategy, model governance, documentation, effectiveness assessment, controls and disclosure readiness.

We can also help management evaluate the practical implications of continuing to apply the IAS 39 portfolio hedge model, or of using IFRS 9 general hedge accounting where that better aligns with the underlying risk strategy and operating model.