This has left these institutions even more vulnerable to an abrupt uptick in interest rates. Time will tell whether and to what extent these risks now materialise. For another thing, rising interest rates depress securities prices, especially at banks that have not hedged securities holdings on their balance sheets – and these tend to be smaller banks, for the most part.
An interest rate shock of 200 basis points would now result in a situation where around half of all institutions saw the present value relative to regulatory own funds decline by more than 20%.