Net interest income sensitivity · RiskAtoms Academy

By the end you will be able to

1Project net interest income over one to three years under rate scenarios on a constant balance sheet, and express the change as a percentage of base NII and of Tier 1.
2Explain how deposit betas, pricing lags and the zero floor shape the result.
3Measure the hedges' contribution to NII sensitivity.
4Read which positions drive the change and why it grows over three years.

Why it matters

If Bank Rate fell by 2.75 percentage points, how much would RiskAtoms Bank earn next year? The gap estimate of L3.6.03: Repricing gap analysis gives one line. The board wants more: the answer over three years, for each line, with and without the hedges, and with deposit customers who may not behave as assumed. That is NII sensitivity, the measure most banks manage to, and the one they publish in their results. For this bank the first-year answer is −£263.3m, 16.0% of next year's income.

Core explanation

Projecting income, line by line

Illustrative dataRiskAtoms Bank plc's banking book

The same £67bn balance sheet as Module 3.5, on one made-up reporting date, in pounds, now with how each line reprices: fixed, floating or administered, its customer rate, a SONIA curve with Bank Rate at 4.00%, a macro hedge and a structural hedge. The figures are round illustrative values, not any bank's data. Every lesson in Module 3.6 uses this book, so the figures agree.

This lesson relies on: a constant balance sheet; parallel moves added in full to renewal rates and floating rates; administered rates moving by beta × the change a month after the market; customer deposit rates floored at zero; post-shock zero rates floored at 0%; and a renewed fix keeping its new rate to the end of the horizon.

NII sensitivity compares two projections of net interest income: a base case on today's curve and a scenario in which rates move. Each line of the book is projected month by month to its next repricing date and beyond, under a rule for what happens when it reprices.

The base case

At today's rates the book earns £1,585.2m a year (L3.6.01: What ALM does). Projected forward on today's curve, base NII is £1,640.9m in year 1, £1,702.8m in year 2 and £1,708.2m in year 3. It rises with no change in rates: five-year fixes written at 3.8% refix at about 5.0%, and structural hedge swaps written at 1.25% roll into today's five-year rate of 4.29%. Old business repricing to today's rates is part of the base, not of the sensitivity.

What replaces what: the balance sheet assumption

A projection must say what happens when a mortgage fix ends or a bond matures. There are three choices:

Constant balance sheet: replace like with like, at the scenario's rates. This isolates the effect of rates, and it is what the Basel disclosure of ΔNII uses (DIS70). The book uses it.
Run-off: replace nothing. Natural for value (L3.6.05: Economic value of equity sensitivity), odd for income, which would shrink as loans mature.
Dynamic: follow the business plan, with growth, changes in mix and customers who react to rates. Closest to what will happen, hardest to check. Banks use it for business planning and budgeting (SRP31.28 allows it).

Scenarios over three years

ΔNII against base on a constant balance sheet, £m; year 1 also as % of base NII and of Tier 1 (£3.5bn)
Parallel move	Year 1	Year 2	Year 3	Three years	Yr 1, % NII	Yr 1, % Tier 1
+100bp	+£91.7m	+£134.6m	+£175.5m	+£401.8m	5.6%	2.62%
−100bp	−£94.8m	−£140.3m	−£180.8m	−£415.9m	−5.8%	−2.71%
+275bp	+£254.7m	+£375.4m	+£488.1m	+£1,118.2m	15.5%	7.28%
−275bp	−£263.3m	−£391.0m	−£502.6m	−£1,156.9m	−16.0%	−7.52%

Three things to read. The bank is asset-sensitive: NII rises with rates and falls when they fall. The response is almost, not quite, symmetric: prepayment trims the gain in a rise and adds to the loss in a cut (L3.6.02: Where interest rate risk in the banking book comes from). And the effect grows each year, from −£263.3m to −£502.6m: in year 1 many fixed positions still earn their old rates; by year 3 more of them have repriced into the new world.

Who gains and who pays at −275bp

Assets lose £843.8m: reserves, floating loans and trackers reprice within weeks. Deposits save only £298.7m, because the bank passes on just its beta of each cut. Wholesale and term funding reprice in full as it rolls. The macro hedge's receive-SONIA legs lose; the structural hedge's pay-SONIA leg gains.

Betas, lags and floors

Administered rates are the heart of NII sensitivity. Three numbers describe each: the beta, the pricing lag (1 month in the book) and the zero floor. At the book's betas the floor never binds in a 275bp cut:

Non-maturity deposit rates after a 275bp cut
Deposit line	Rate today	Beta	After, book beta	After, beta 100%
Personal current accounts	0.50%	10%	0.22%	0.00% (floor)
Instant-access savings	3.00%	60%	1.35%	0.25%
Operational corporate deposits	1.00%	25%	0.31%	0.00% (floor)
Corporate call accounts	3.50%	80%	1.30%	0.75%

With full pass-through it would. The cut would then hit the bank's deposit margin far less: year-1 NII would fall only £87.6m, even after £534.0m of cuts the floor prevents. But a rise would now hurt: −£454.9m at +275bp, because every deposit would cost the full move. A bank's rate risk depends as much on its customers' behaviour as on its contracts, which is why betas get as much ALCO time as hedges (L3.6.09: Non-maturity deposits).

What the hedges contribute

Year-1 ΔNII with and without each hedge, £m
Hedges	Base NII, year 1	+100bp	−275bp
Both hedges	£1,640.9m	+£91.7m	−£263.3m
Macro hedge only	£1,656.2m	+£215.7m	−£604.3m
Structural hedge only	£1,539.8m	−£40.2m	+£99.4m
No hedges	£1,555.2m	+£83.8m	−£241.6m

The two hedges pull in opposite directions. The macro hedge pays fixed and receives SONIA, so it turns fixed mortgages into floating assets: it protects value but adds to NII sensitivity. With it alone, a 275bp cut costs £604.3m. The structural hedge receives fixed and pays SONIA on balances that cost almost nothing, locking in their income: with it, the cut costs £263.3m. Without either hedge the bank would lose £241.6m: its fixed mortgages and its sticky deposits partly hedge each other naturally. L3.6.10: Hedging the banking book shows how treasury sizes the two.

Before you trust an NII number, ask

The formal version

Each position $i$ of amount $A_i$ pays or earns its current rate until it reprices, then a scenario rate. For year $y$ under a parallel move $\Delta$ :

\begin{aligned} \text{fixed: } & r_i \;\rightarrow\; r_i^{\text{new}} + \Delta \quad \text{at maturity, end of fix or prepayment} \\ \text{floating: } & r_i \;\rightarrow\; r_i + \Delta \quad \text{at the next reset} \\ \text{administered: } & r_i \;\rightarrow\; \max\!\left(0,\ r_i + \beta_i\,\Delta\right) \quad \text{after the lag } L \end{aligned}

The result is read as a percentage (M-A01: Percentages): of base NII for the board, of Tier 1 for supervisors. At −275bp:

\begin{aligned} \frac{\Delta\text{NII}}{\text{NII}_{\text{base}}} &= \frac{-263.3}{1{,}640.9} \times 100\% = -16.0\% \\ \frac{\Delta\text{NII}}{\text{Tier 1}} &= \frac{-263.3}{3{,}500} \times 100\% = -7.52\% \end{aligned}

Try it

Move rates, change the horizon, raise the deposit betas and switch the hedges. Watch the curve of ΔNII against the move: is it a straight line? Try full pass-through with a 400bp cut and watch the floor.

Try itNII sensitivity lab

Parallel move in all rates−275bp

Horizon

Deposit betas

ΔNII over 1 year

ΔNII, 1 year−£263.3m

% of base NII−16.0%

Base NII over the horizon£1,640.9m

Year-1 ΔNII as % of Tier 1−7.52%

Bank Rate moves by−275bp

Cost of the zero floor on deposits£0.0m

Illustrative book, constant balance sheet. Deposit rates move by their betas a month after the market and stop at zero. Zero rates stop at 0%: today's overnight zero rate is 3.92% (Bank Rate's 4.00%, continuously compounded), so a cut beyond 392bp goes no further. The beta choice changes the four non-maturity deposit lines only.

Worked example

A 275bp cut, line by line

Bank Rate and every SONIA rate fall 2.75 percentage points today. ALM checks the main lines of the year-1 projection by hand against the model. Figures are from the book, in pounds.

From each line to the total

Step 1 of 5

1
Reserves
£6bn earning Bank Rate, repricing overnight:
$\text{£}6\text{bn} \times (-2.75\%) \times \left(1 - \tfrac{1}{365}\right) = -\text{£}164.5\text{m}$

Regulatory lens

The Basel standard requires earnings measures alongside value (SRP31, Principle 4), and the annual disclosure (DIS70, template IRRBB1) reports ΔEVE and ΔNII under each of the six standard shocks, with ΔNII over a rolling 12 months on a constant balance sheet. The EU adds a supervisory outlier test on NII, at 5% of Tier 1 in the parallel shocks (Delegated Regulation (EU) 2024/856). The UK treatment, and the rules in detail, are in M4.5: Liquidity and IRRBB regulation; the behavioural models behind betas and prepayment are in M6.7: Liquidity, ALM and behavioural models.

Spark Atoms

Spark AtomIncome rising with no change in rates

NatWest Group's 2025 annual report said it expected total structural hedge income to rise by around £1.5 billion in 2026 compared with 2025, and by a further £1 billion in 2027. Its 2025 net interest margin was 2.34%. The book shows the same kind of effect in miniature, as hedges written at lower rates roll into higher ones: base NII rises from £1,641m to £1,708m over three years on an unchanged curve.

Spark AtomThe floor is an option the bank wrote

With full pass-through, the floor on current accounts alone would cost £453.8m in year 1 of a 275bp cut: the beta says −2.25%, the customer gets 0%. Banks learned this in the decade of near-zero rates after 2009, when deposit rates had nowhere left to fall but loan rates kept going down.

Key takeaways

NII sensitivity is projected NII in a scenario less base NII, over one to three years, usually on a constant balance sheet.
On the book: +£91.7m in year 1 for +100bp and −£263.3m for −275bp (−16.0% of base NII, −7.52% of Tier 1); the effect grows over three years.
Administered deposits drive the result through their betas, pricing lag and zero floor; higher betas would make the bank less exposed to cuts and more to rises.
The macro hedge adds NII sensitivity and the structural hedge removes it: −275bp costs £604.3m with the macro hedge alone and £263.3m with both.
Read NII changes as percentages: of base NII for the board, of Tier 1 for supervisors.

Reaction

Check what stuck

Question 1 · objective 1

Base NII for next year is £1,600m. A rate scenario cuts it by £240m. What is the change, in % of base NII?

%

Question 2 · objective 2

A bank has £5bn of savings at 2.5% with a beta of 0.5. Market rates fall by 2%, and the bank cuts its savings rate a month later. How much does it save on interest over the first year, in £m?

£m

Question 3 · objective 2

£10bn of current accounts pay 0.25%, beta 0.5. Rates fall by 1%. The beta says the rate should become −0.25%, but it stops at zero. What does the floor cost the bank a year, in £m?

£m

Question 4 · objective 1

What does a constant balance sheet assume?

AEvery loan, deposit or hedge that matures, reprices or prepays is replaced by the same business at the scenario's ratesBNothing matures during the horizonCThe bank grows in line with its business planDRates stay constant over the horizon

Question 5 · objective 3

Why does RiskAtoms Bank's year-1 NII fall by £604.3m at −275bp without the structural hedge, but only £263.3m with it?

AThe receive-fixed hedge earns its fixed rates whatever happens and pays SONIA, which falls: it locks in income on balances whose own rates hardly moveBThe structural hedge stops deposits from leavingCThe structural hedge raises customer ratesDWithout it the bank's deposits would reprice faster

Glossary

NII sensitivity: NII sensitivity: the change in projected net interest income over a horizon when rates follow a scenario instead of the base case.
Base case: Base case: the projection with today's curve and today's customer pricing, against which every scenario is measured.
Constant balance sheet: Constant balance sheet: every position that matures, reprices or prepays is replaced by the same business, so the balance sheet keeps its size and mix.
Run-off balance sheet: Run-off balance sheet: maturing positions are not replaced. Used for EVE.
Dynamic balance sheet: Dynamic balance sheet: the projection includes the bank's business plan, such as growth and changes in mix, and how customers react to rates.
Deposit beta: Deposit beta: the share of a market rate change the bank passes on to an administered deposit rate.
Pricing lag: Pricing lag: the time between a market move and the change in an administered rate, often set by notice the bank must give customers.
Zero floor: Zero floor: customer deposit rates are not cut below zero, whatever happens to market rates.
Deposit margin: Deposit margin: what the bank earns on a deposit, the market rate less the customer rate.

Deep Dives & Origins

Deep Dives

Basel Committee on Banking Supervision, Basel Framework, DIS70 Interest rate risk in the banking book, BIS: what banks disclose on ΔNII and ΔEVE, and the assumptions behind them. Intermediate.
NatWest Group plc, Annual Report and Accounts 2025, Financial review: how a large UK bank talks about its structural hedge and margin. Introductory.

Origins

Basel Committee on Banking Supervision, Basel Framework, SRP31 Interest rate risk in the banking book, paragraphs 31.28 and 31.29, BIS, version in force from 1 January 2026.
Basel Committee on Banking Supervision, Basel Framework, DIS70 Interest rate risk in the banking book, BIS, version effective 15 December 2019.
European Commission, Commission Delegated Regulation (EU) 2024/856 of 1 December 2023 (regulatory technical standards on the supervisory shock scenarios, the common modelling and parametric assumptions and what constitutes a large decline), Article 5, Official Journal of the European Union, 2024.
NatWest Group plc, Annual Report and Accounts 2025, Financial review, pages 83 to 85.

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