Question
In times of already negative interest rates, how should banks apply the 0% floor?
Background on the question
The calculation focuses on the comparison of base scenario and -200bps scenario – if then the base scenario already incorporates negative interest rates, banks could interpret that the negative interest rate curve has to be shifted to zero. This might result in a (partially) positive shock in the downward scenario. Questions were raised during On-Site Inspections and within the scope of the ongoing su-pervisory process
Answer
According to Paragraph 24(a) of the EBA/GL/2015/08 on the management of interest rate risk arising from non-trading activities, the standard shock should be based on a sudden parallel +/- 200 basis point shift of the yield curve, applying a 0% floor. If interest rates in the base scenario are in a negative range, they should not be raised to zero when applying the -200bps/+200bps scenarios. Instead, the downward shock should be floored at the level of the current negative rate. The floor does not apply to upward shocks.