All institutions should compute ∆EVE and ∆NII under the six scenarios prescribed in Annex 2 of the Basel Standards on IRRBB and pasted in the following table. The interest rate shocks for AED can be directly derived from those corresponding to USD. For convenience, the AED shocks have been computed and provided below. For other currencies, all institutions should compute themselves the corresponding interest shocks based on the methodology outlined in the Basel Standards on IRRBB. The six interest rate shocks are as follows:
(i)
Parallel shock up,
(ii)
Parallel shock down,
(iii)
Steepener shock (short rates down and long rates up),
(iv)
Flattener shock (short rates up and long rates down),
(v)
Short rates shock up, and
(vi)
Short rates shock down.
6.5.2
In addition to the standard shocks prescribed by the Basel Standards on IRRBB, LSIs should define other scenarios combining shift of yield curves with changes in basis and commercial margins in order to comprehensively capture the risk profile of their balance sheet structure. These institutions should ensure that scenarios are commensurate with the nature, and complexity of their activities.
The choice of scenarios should be supported by an appropriate governance and fully documented. All institutions should integrate the IRRBB scenarios and results in their stress testing framework and in enterprise-wide stress testing exercises.
Table 12: Standard shocks per scenario (bp) for AED prescribed by the BIS method
Time Buckets (M: months ; Y: Years)
Tenors (years)
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Short-Term
t = Overnight (O/N)
0.0028
200
-200
-195
240
300
-300
O/N < t <= 1M
0.0417
200
-200
-192
237
297
-297
1M < t <= 3M
0.1667
200
-200
-182
227
288
-288
3M < t <= 6M
0.375
200
-200
-165
210
273
-273
6M < t <= 9M
0.625
200
-200
-147
192
257
-257
9M < t <= 1Y
0.875
200
-200
-130
175
241
-241
1Y < t <= 1.5Y
1.25
200
-200
-106
151
219
-219
1.5Y < t <= 2Y
1.75
200
-200
-78
123
194
-194
Medium-Term
2Y < t <= 3Y
2.5
200
-200
-42
87
161
-161
3Y < t <= 4Y
3.5
200
-200
-3
48
125
-125
4Y < t <= 5Y
4.5
200
-200
28
17
97
-97
5Y < t <= 6Y
5.5
200
-200
52
-7
76
-76
6Y < t <= 7Y
6.5
200
-200
70
-25
59
-59
Long-Term
7Y < t <= 8Y
7.5
200
-200
84
-39
46
-46
8Y < t <= 9Y
8.5
200
-200
96
-51
36
-36
9Y < t <= 10Y
9.5
200
-200
104
-59
28
-28
10Y < t <= 15Y
12.5
200
-200
121
-76
13
-13
15Y < t <= 20Y
17.5
200
-200
131
-86
4
-4
t > 20Y
25
200
-200
134
-89
1
-1
6.5.3
Institutions should consider the possibility of negative interest rates and understand the impact on their balance sheet and business models. For each asset and liability, if the legal documentation of the contract stipulates a certain treatment of negative rates, then this treatment should be used. If the legal documentation is silent on the treatment of negative rates, then such negative rates should be used to price assets, but they should be floored at 0% for deposits (liabilities) because there is little evidence supporting the assumption that both retail and corporate clients would accept being charged for depositing their funds in UAE banks.