BCBS recalibration of interest rate shocks for IRRBB

In July 2024, the Basel Committee on Banking Supervision (BCBS) finalized guidance on the recalibration of interest rate shocks for interest rate risk in the banking book (IRRBB), replacing the shocks section in the existing standard. The revised shocks became effective on 1 January 2026 and have been incorporated into the consolidated Basel framework.

This flyer summarizes the methodology changes, potential impacts on banks and practical response strategies.

What’s inside

(1) Updated shock calibration methodology

Table on page 2 outlines adjustments to the shock calibration methodology, including an extended historical data period, a shift in the percentile applied, revised rounding rules and the use of local absolute shock factors instead of global relative measures.

(2) New standardized shock scenarios

Tables on page 2 present the revised shocks by currency and tenor, including notable increases for USD, EUR and GBP.

(3) Impact on banks

The recalibrated shocks introduce higher stress magnitudes for most major currencies. For example, the USD long shock increases from 150 to 225 basis points, largely driven by a tighter percentile calculation reflecting historical movements such as those observed in 2008.

Key implications include:

• Increased pressure on EVE and NII
  Higher stress magnitudes may lead to a greater decline in Economic Value of Equity (EVE) and increased Net Interest Income (NII) sensitivity, particularly where repricing mismatches and embedded optionality exist.

• Closer proximity to supervisory triggers
  Banks with structural gaps or optionality may see stressed results move closer to ∆EVE outlier thresholds under certain scenarios.

• ALM strategy adjustments
  Adverse movements in EVE or NII may prompt reassessment of:
  - product design (reducing optionality)
  - term funding mix
  - hedging approaches

(4) Implications for behavioral models

The larger shocks have a significant impact on banks that incorporate scenario-specific interest rate paths in their models. Key considerations include:

• Model recalibration
  Assumptions developed under milder shock environments may no longer be sufficiently conservative. Banks may need to conduct new sensitivity analyses or re-estimate behavioral parameters.

• Optionality and customer behavior
  The revised shocks heighten the importance of assumptions related to prepayment, deposit decay and early redemption. Updates may be required for models such as conditional prepayment rates (CPR) and core deposit ratios (CDR). 

Even where behavioral models do not explicitly incorporate shocked scenarios, higher shock magnitudes will still affect EVE and NII through repricing gaps and optionality.

(5) Governance and risk management

EVE and NII remain the primary IRRBB management metrics, although they typically move in opposite directions as interest rates change. The revised stress magnitudes increase the likelihood of breaching supervisory outlier thresholds.

This may require a review of:

• internal limit frameworks and methodologies
• hedging effectiveness across different interest rate scenarios
• bank-specific stress scenarios to complement standardized shocks, as recommended by the BCBS

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