Definition
NII (net interest income) is the difference between interest earned on assets and interest paid on liabilities over a given horizon. In asset liability management, it is projected over at least the next twelve months, often three to five years for steering purposes.
NII sensitivity, ΔNII, compares projected income under a shocked rate scenario with projected income under the reference scenario. It complements EVE: EVE looks at value, NII looks at earnings.
Calculation method
- Project balances and repricing dates contract by contract.
- Set the balance sheet assumption: constant (maturing positions replaced like for like), static (no renewal) or dynamic (new business according to the business plan).
- Apply the shocked curve to each scenario together with pass-through rules for client rates, especially on deposits.
- Compute projected interest by period and derive ΔNII against the reference.
Regulatory requirement
The EBA IRRBB guidelines (EBA/GL/2022/14) require interest rate risk to be measured both in value (EVE) and in earnings (NII). The EBA technical standards on the supervisory outlier test set an NII threshold: a one-year NII decline on a constant balance sheet greater than 5% of Tier 1 capital under the parallel scenarios signals elevated risk and triggers a dialogue with the supervisor.
NII is reported in the IRRBB templates and integrated into ICAAP projections.
Practical challenges
- Deposit pass-through assumptions, put to the test by the 2022 rate rise.
- Consistency between the ALM, controlling and budget views of NII, often produced in different tools.
- Explaining differences between scenarios and reporting dates, item by item.
In RIALTO
This concept is covered by the IRRBB Insight Core module. The use case 'Query your results in natural language' shows it in practice.