How is net interest income (NII) sensitivity modeled?

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AcadiFi · Accepted Answer

NII sensitivity projects net interest income over a 12-month horizon under rate shocks and compares it to a base case. The model simulates rolling cash flows: maturing assets and liabilities, new production at prevailing rates, reinvestment of coupon income, and pricing responses on non-maturity deposits. For each rate scenario, the bank computes projected interest income, interest expense, and the difference. Example: a bank has $5B in floating-rate loans priced at Prime + 2%, $3B in 5-year fixed loans at 5%, $4B in non-maturity deposits with a 30% beta (i.e., a 100 bp rate rise passes through as 30 bp deposit cost), and $2B in 1-year CDs at 3.5%. Under a +200 bp parallel shock held constant for 12 months, floating loans reprice fully ($5B * 2% = +$100M), fixed loans do not reprice ($0), new CD production costs 200 bp more ($2B * 2% = -$40M), and deposits reprice at 30% beta ($4B * 0.6% = -$24M). Net NII change = +$36M. Critical assumptions: static vs dynamic balance sheet (does volume stay constant?), deposit beta and lag, pricing discipline on new loans, and the treatment of pipeline commitments. NII sensitivity is a short-horizon earnings view; it misses convexity, long-term repricing, and optionality. EVE complements NII by capturing these. Best practice reports both under each standardized scenario.

How is net interest income (NII) sensitivity modeled?

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