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FRM Part II · FRM Exam Part II · Stress Testing Banks

A bank models net interest income under a stress scenario in which short-term rates fall sharply and deposit rates are already near zero. Which modeling consideration is most important for projecting the revenue impact?

The key consideration is that deposit rates have floors near zero while asset yields keep repricing downward, so margins compress. Models should therefore not assume deposit betas are symmetric between rising and falling rate environments.

  1. ADeposit rates can only be assumed to fall one-for-one with market rates, so margins stay constant
  2. BDeposit pricing floors and asset repricing behavior compress the margin, so deposit betas should not be assumed to remain symmetricCorrect
  3. CNet interest income is unaffected by rate changes if the balance sheet is held constant
  4. DFee income should be modeled as a perfect hedge against net interest income declines

Explanation

When deposit rates cannot fall further, asset yields keep repricing downward and the margin compresses. Assuming symmetric betas hides this effect. Other options assume constant margins or perfect offsets without basis.

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