The standard shock scenarios · RiskAtoms Academy

By the end you will be able to

1Build the six standard interest rate shocks from their formulas, with x = 4 and the sterling sizes.
2Explain what the 2024 recalibration changed and how the post-shock floor works.
3Run the six shocks on a banking book and apply the outlier test: the worst fall in EVE against 15% of Tier 1.
4Compare the EVE test with the EU's NII test and explain why a bank can pass one and fail the other.

Why it matters

Every bank can choose a shock that makes its own book look safe. To stop that, the Basel Committee fixes six shocks, the same shapes for every bank, with sizes set by currency. Each bank revalues its banking book under all six, and the worst fall in value is compared with its capital. Above 15% of Tier 1, the supervisor calls the bank an outlier and looks harder. RiskAtoms Bank's worst result is £257.2m, 7.35% of Tier 1. Without its structural hedge it would be 22.0%.

Core explanation

Six shocks, three numbers per currency

Illustrative dataRiskAtoms Bank plc's banking book

The same £67bn balance sheet as Module 3.5, on one made-up reporting date, in pounds, with how each line reprices (fixed, floating or administered), its customer rate, a SONIA curve with Bank Rate at 4.00%, a £19.2bn macro hedge on the fixed-rate mortgages and a £16bn structural hedge. Tier 1 capital is taken as £3.5bn. The figures are round illustrative values, not any bank's data. Every lesson in Module 3.6 uses this book, so the figures agree.

The book applies each shock to the zero rate at every cash flow's own date. The standard first slots cash flows into 19 time buckets; using exact dates is a simplification that changes little here. Shocks are added to customer rates as they are, although those are annual rates and the curve is continuous.

L3.6.05: Economic value of equity sensitivity shifted the whole curve. Real curves twist as well. The standard captures the main shapes with six scenarios built from three sizes for each currency: a parallel size, a short-rate size and a long-rate size.

Parallel up and down (parallel): the same move at every tenor.
Short up and down (short-rate shock): the full size at overnight, fading to almost nothing by 20 years.
Steepener and flattener (rotations): a steepener pulls the short end down and pushes the long end up; a flattener does the reverse.

Sterling sizes in force from 1 January 2026, before the floor
Shock at tenor (bp)	3m	1y	2y	3.5y	5y	10y	20y
Parallel up	275	275	275	275	275	275	275
Parallel down	−275	−275	−275	−275	−275	−275	−275
Steepener	−246	−165	−79	16	81	184	222
Flattener	310	232	147	54	−10	−110	−147
Short up	399	331	258	177	122	35	3
Short down	−399	−331	−258	−177	−122	−35	−3

The sizes and the 2024 recalibration

The sizes come from history: how far each currency's rates have moved over six-month windows. In July 2024 the Basel Committee recalibrated them (the recalibration), to be in force from 1 January 2026. It extended the data from December 2015 to December 2023, replaced global shock factors with currency-specific ones, raised the percentile from the 99th to the 99.9th and rounded to 25bp instead of 50bp. The caps (400bp parallel, 500bp short, 300bp long) and the 100bp minimum stayed. Sterling's shocks grew:

Basel shock sizes in bp, 2016 standard → in force from 2026 (SRP31.90, Table 2)
Currency	Parallel	Short	Long
GBP	250 → 275	300 → 425	150 → 250
EUR	200 → 225	250 → 350	100 → 200
USD	200 → 200	300 → 300	150 → 225
JPY (unchanged)	100	100	100

The floor

A 425bp cut from a 3.92% overnight rate would leave it at −0.33%. The standard lets national supervisors set a floor on post-shock rates, as long as it is not above zero. The book uses 0%, the highest allowed. It binds only in short down, and only up to 3.5 months: beyond that, today's curve is high enough to absorb the shock.

TodayShort down, floored at 0%Short down, no floor

The floor trims the book's EVE gain in short down from £103.0m to £99.8m, and its NII loss from £355.2m to £307.4m: without it the floating assets would earn a negative rate while deposit rates, floored at zero, could not follow.

The six shocks on RiskAtoms Bank

Scenario	CPR multiplier	ΔEVE	ΔEVE ÷ Tier 1	ΔNII, year 1
Parallel up	× 0.8	−£257.2m	−7.35%	+£254.7m
Parallel down	× 1.2	+£251.7m	7.19%	−£263.3m
Steepener	× 0.8	−£79.6m	−2.27%	−£191.6m
Flattener	× 1.2	+£10.2m	0.29%	+£253.7m
Short up	× 0.8	−£119.4m	−3.41%	+£337.5m
Short down	× 1.2	+£99.8m	2.85%	−£307.4m

EVE falls in the three scenarios that raise rates where the book is long: parallel up, short up and, more mildly, the steepener, which lifts rates beyond 3.2 years where the fixed mortgages and the structural hedge sit. NII tells the opposite story in most scenarios, because the bank earns more when its large deposit base reprices slowly. The outlier test takes the worst ΔEVE: parallel up, £257.2m, 7.35% of Tier 1, well inside the 15% threshold of £525m. With the old sterling sizes the same scenario would cost £235.4m (6.73%).

Sort itWhich way does EVE move?

For RiskAtoms Bank's book, does each shock raise or lower EVE? Think about where the book is long fixed rate.

Parallel up
Short down
Steepener
Flattener
Short up

The EU's earnings test, for comparison

Since 14 May 2024 EU banks also face a supervisory outlier test on NII (Commission Delegated Regulation (EU) 2024/856): a fall in one-year NII of more than 5% of Tier 1, on a constant balance sheet, under the parallel shocks. RiskAtoms Bank is a UK bank and the UK approach is not modelled here, but applying the EU test to its book is instructive: parallel down cuts NII by £263.3m, 7.52% of Tier 1, above the 5% line of £175m.

Two tests, two answers

The same book passes the value test with room to spare and would be flagged by the earnings test. The two look at different risks: EVE at what today's positions are worth; NII at next year's income when deposit rates cannot fall as far as asset rates.

The formal version

The shapes use the exponential decay of M-A05: The number e and continuous growth. For tenor $t$ in years, currency sizes $\bar R$ and $x = 4$ :

Where the rotations pivot. Write $s = e^{-t/4}$ . The steepener is zero where the two terms balance:

\begin{aligned} -0.65\,\bar R_{\text{short}}\,s + 0.9\,\bar R_{\text{long}}\,(1 - s) &= 0 \\ s &= \frac{0.9\,\bar R_{\text{long}}}{0.65\,\bar R_{\text{short}} + 0.9\,\bar R_{\text{long}}} = \frac{0.9 \times 250}{0.65 \times 425 + 0.9 \times 250} = 0.4489 \\ t &= -4 \ln s = 3.20\ \text{years} \end{aligned}

The same steps for the flattener (weights 0.8 and 0.6) give $s = 0.3061$ and a pivot at 4.74 years. The short shock halves every $4 \ln 2 = 2.77$ years, and the decay factor at the tenors in the table is:

Tenor	3m	1y	2y	3.5y	5y	10y	20y
e^(−t/4)	0.9394	0.7788	0.6065	0.4169	0.2865	0.0821	0.0067

The floor. Post-shock rate at $t$ is $\max\big(0,\ z(t) + \Delta R(t)\big)$ . In short down it binds while $z(t) < 0.0425\,e^{-t/4}$ , up to $t = 0.293$ years.

The outlier test. With $\Delta\text{EVE}_k$ the change in scenario $k$ :

\text{outlier} \iff \max_{k = 1,\ldots,6}\big(-\Delta\text{EVE}_k\big) > 15\% \times \text{Tier 1}

Try it

Pick a scenario and watch the curve move. Then switch the floor off in short down, compare the 2016 and 2026 sizes, and take the structural hedge out: the worst scenario changes and the bank crosses the line.

Try itRun the six shocks on the book

Scenario

GBP shock sizes

0% floor

Structural hedge

Today's SONIA zero curveShort down

ΔEVE, Short down+£99.8m

ΔNII, year 1−£307.4m

Worst scenarioParallel up

Worst ΔEVE ÷ Tier 1 (£3.5bn)7.35%

Outlier test (15%)Passes

Overnight rate after the shock0.00%

Shocks are added to continuously compounded zero rates at each cash flow's own date; prepayment speeds change by the standard's multipliers (0.8 or 1.2). The floor only binds at the short end of short down. Illustrative book.

Worked example

A steepener by hand, then the test

Sterling sizes in force from 2026: short 425bp, long 250bp, x = 4.

From the formula to the outlier test

Step 1 of 6

1
The decay factor at 3.5 years
$s = e^{-3.5/4} = e^{-0.875} = 0.4169$

Regulatory lens

The scenarios, formulas, sizes and floor are in Basel Framework SRP31 (paragraphs 31.90 to 31.93) and the method for the sizes in SRP98; the outlier test is SRP31.82 and 31.83, which also allow supervisors to add tests as long as they are at least as strict. The EU has written both tests into law (Article 98(5) of the Capital Requirements Directive, with the scenarios and the NII threshold in Delegated Regulation (EU) 2024/856). How the UK applies them, the standardised framework for banks without approved models, and the disclosure tables are covered in M4.5: Liquidity and IRRBB regulation.

Spark Atoms

Spark AtomBuilt in a world of zero rates

The first sizes were calibrated on data from 2000 to 2015, years that ended with many rates near zero. In 2024 the Committee said its method had problems capturing rate movements when rates are near zero. The recalibration, with data to 2023, made sterling's short shock 42% larger.

Spark AtomFour years is a choice

The decay constant x = 4 sets how fast the short shock fades: a quarter of it is left at 5.5 years (4 ln 4). A shorter x would leave five-year fixes almost untouched by a short shock; a longer one would make it look like a parallel shift.

Key takeaways

Six shocks: parallel up and down, short up and down, steepener and flattener, built from three sizes per currency.
Short shock = size × e^(−t/4); long shape = size × (1 − e^(−t/4)); steepener −0.65 short + 0.9 long; flattener +0.8 short − 0.6 long.
Sterling sizes rose from 250/300/150bp to 275/425/250bp in the 2024 recalibration, in force from 1 January 2026; floors on post-shock rates may not be above zero.
The outlier test compares the worst ΔEVE with 15% of Tier 1: RiskAtoms Bank's worst is parallel up, 7.35%.
The EU's NII test (5% of Tier 1, parallel shocks, one year) would flag the same book at 7.52%: value and earnings tests can disagree.

Reaction

Check what stuck

Question 1 · objective 1

With the sterling short-rate size of 425bp and x = 4, how large is the short up shock at a tenor of 2 years, in bp?

bp

Question 2 · objective 1

What does the sterling steepener do to the overnight rate (t = 0), in bp? Give a negative number for a fall.

bp

Question 3 · objective 3

A bank has Tier 1 capital of £2,000m. Its worst ΔEVE across the six shocks is −£280m. What is that as a share of Tier 1, in %?

%

Question 4 · objective 2

What did the July 2024 recalibration change?

AThe shock sizes: rate data to the end of 2023, currency-specific shock factors, a higher percentile and rounding to 25bp, in force from 1 January 2026BThe number of scenarios, from six to eightCThe outlier threshold, from 15% to 20% of Tier 1DThe decay constant x, from 4 to 2 years

Question 5 · objective 4

RiskAtoms Bank passes the EVE outlier test with 7.35% of Tier 1, but under the EU's NII test it would show a fall of 7.52% against a 5% threshold. What follows?

AThe two tests look at different risks; a bank can be fine on value and exposed on earnings, so supervisors use bothBThe NII test must be wrong, because the EVE test is the Basel standardCThe bank should drop its structural hedge to pass bothDPassing the EVE test means NII cannot fall

Glossary

Parallel shock: The same change in the zero rate at every tenor, up or down.
Short-rate shock: A shock largest at the overnight rate that dies away with tenor as e^(−t/4).
Rotation: A shock that moves the short and long ends in opposite directions: a steepener or a flattener.
Steepener: Short rates fall and long rates rise, so the curve gets steeper.
Flattener: Short rates rise and long rates fall, so the curve gets flatter.
Post-shock floor: A lower bound on rates after the shock. The Basel standard lets supervisors set one, no higher than zero.
Outlier bank: A bank whose largest fall in EVE over the six standard shocks is more than 15% of its Tier 1 capital. Supervisors then look harder at its interest rate risk.
Recalibration (2024): The Basel Committee's July 2024 update of the shock sizes, using rate data to 2023, in force from 1 January 2026.
NII supervisory outlier test: The EU's supervisory outlier test on earnings: a fall in one-year NII of more than 5% of Tier 1 under the parallel shocks.
Tier 1 capital: The highest-quality capital: common equity Tier 1 plus Additional Tier 1 instruments.

Deep Dives & Origins

Deep Dives

Basel Committee on Banking Supervision, Recalibration of shocks for interest rate risk in the banking book, BIS, July 2024. Advanced.
Basel Committee on Banking Supervision, Interest rate risk in the banking book, BIS, April 2016: the standardised framework and Annex 2 on the shocks. Advanced.

Origins

Basel Committee on Banking Supervision, Basel Framework, SRP31 Interest rate risk in the banking book, paragraphs 31.82, 31.83 and 31.90 to 31.93, version in force from 1 January 2026, BIS.
Basel Committee on Banking Supervision, Recalibration of shocks for interest rate risk in the banking book, BIS, 16 July 2024, and its summary page.
Basel Committee on Banking Supervision, Basel Framework, SRP98, paragraphs 98.57 to 98.63 (calibration, caps and floors), version in force from 1 January 2026, BIS.
European Commission, Commission Delegated Regulation (EU) 2024/856 of 1 December 2023 on the supervisory shock scenarios and what constitutes a large decline (Articles 1 and 5), in force 14 May 2024; KPMG Ireland, IRRBB & CSRBB: Regulatory Updates, May 2024.

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