With the end of the pandemic related restrictions, adverse demand and supply shocks have driven up inflation and interest rates. Over the course of 2022 alone, interest rates rose by around 200-300 basis points – an increase that would previously have been classified as a “stress scenario”.
The Basel interest rate coefficient, which is used to assess the exposure of banks to interest rate risk, assumes an upward shift of 200 basis points. These shocks have already tested existing buffers. Higher interest rate risks affect balance sheet valuations and expose financial institutions to potential losses.