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

In modeling stressed net interest income for a bank with a large book of floating-rate loans funded by sticky retail deposits, the scenario features sharply falling policy rates. Which modeling assumption is most important to capture the revenue impact?

The key assumption is that deposit rates have floors and reprice with a lag, so asset yields on floating-rate loans fall faster than funding costs. This compresses the net interest margin and reduces stressed revenue, whereas assuming full immediate pass-through would overstate income.

  1. ADeposit rates will fall by the same amount as loan yields immediately
  2. BDeposit pricing floors and lagged repricing will compress the net interest margin as asset yields fall faster than funding costsCorrect
  3. CLoan volumes are unaffected by the macroeconomic scenario
  4. DNet interest income is independent of the interest rate path

Explanation

With floating-rate assets repricing quickly and deposits having floors and lagged betas, margins compress when rates fall. Assuming full immediate deposit pass-through would overstate revenue under the scenario.

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