Hedge accounting determines how much of a bank's structural hedge shows up as smoother net interest income (NII) rather than generating volatility in the profit and loss (P&L) statement and capital. Currently, accounting rules act as a bottleneck for balance sheet optimization, and standard-setters on both sides of the Atlantic (such as the IASB and FASB) are rewriting the rules.

The Economics of Accounting Mismatch

To stabilize earnings through the interest rate cycle, banks invest their behaviorally stable balances (such as rate-insensitive deposits and equity) in rolling ladders of receive-fixed swaps or fixed-rate bonds. The problem arises because hedging derivatives are valued at fair value through P&L in every period, while banking book loans and deposits are held at amortized cost. Without hedge accounting, these economic hedges create noise in capital and earnings.

Hedge accounting solves this by aligning the timing of recognition, providing critical benefits for institutions:

• Stabilizes earnings by reflecting the swap's mark-to-market as smoother NII.   

• Protects capital by filtering cash flow hedge (CFH) reserves out of CET1.   Enables a lighter balance sheet by funding with swaps instead of buying fixed-rate bonds, preserving liquidity flexibility.   

• Provides the freedom to hedge optimally based on IRRBB risk appetite rather than accounting limitations.

However, the binding constraint is the supply of eligible hedged items; equity and many deposits are not eligible, which restricts how much of the structural hedge can qualify.  

The IASB's RMA Model and Industry Response

In December 2025, the IASB published a draft for an optional new IFRS 9 model called Risk Mitigation Accounting (RMA), which would replace the IAS 39 macro hedging framework.

However, the industry has expressed significant concern. Recent fieldwork and analyses by institutions like HSBC state that RMA is unworkable as currently drafted. Key issues identified include:

• An "Excess Test" and time band limits that can force immediate, irreversible P&L hits even on effective hedges.

• The exclusion of equity, which forces structural equity hedges to remain on proxy accounting models.

• Behavioral deposit models becoming audited point estimates.

Faced with this, pragmatic alternatives have been proposed, such as making the EU carve-out version of IAS 39 official IFRS globally, or creating a new business-model approach called "Held for Hedging".

We are at a decisive moment where accounting could transform how banks manage their interest rate risk in the banking book. For Treasury and Finance teams, the next 12 months require proactive moves: institutions must map their eligible hedge capacity against RMA, field-test the proposed model on real books, harden the governance of IRRBB behavioral models, and collectively engage in standard-setter consultations to push for a single global standard.