---
name: interest-rate-risk-scenario-generator
description: "Generates a complete set of named interest rate scenarios — parallel shifts, steepeners, flatteners, twists, and inversions — with tenor-by-tenor basis-point assumptions, rationale, and expected NII/EVE directional impact, calibrated to a specific balance sheet and regulatory framework. Use when building interest rate stress test scenarios, populating an IRRBB scenario set, refreshing ALM model inputs, or preparing rate-risk scenarios for ALCO or regulatory submission."
argument-hint: "[balance-sheet-profile] [regulatory-framework]"
allowed-tools: ["Read"]
---

# Interest Rate Risk Scenario Generator

## Purpose
Produce a fully specified, named set of interest rate scenarios with tenor-level basis-point shocks and modeling assumptions — ready to load directly into NII and EVE models — so ALM analysts stop hand-building scenario tables and get a consistent, defensible, balance-sheet-aware scenario suite for stress testing and IRRBB reporting.

## When to Use
Invoke this skill when the user asks to:
- Build or refresh a set of interest rate stress scenarios for NII or EVE modeling
- Generate the regulatory IRRBB scenarios (parallel up/down, steepener, flattener, short-rate up/down)
- Create custom rate shocks beyond the standard regulatory set (twists, inversions, gradual ramps)
- Populate ALM model inputs with tenor-by-tenor rate assumptions
- Prepare scenario documentation for an ALCO deck or examiner request
- Calibrate scenario magnitudes to a specific balance sheet or rate environment

## Inputs Required
Before starting, collect:
- **Balance sheet profile**: Asset/liability sensitivity — asset-sensitive, liability-sensitive, or roughly matched; approximate repricing gap
- **Base yield curve**: Current curve by key tenor (overnight, 3M, 1Y, 2Y, 5Y, 10Y, 30Y) — or the curve date to reference
- **Regulatory framework**: BCBS IRRBB standard, U.S. interagency guidance, EBA guidelines, or internal policy set
- **Modeling horizon**: NII horizon (e.g., 12–24 months) and whether EVE (economic value) is also being modeled
- **Institution size/complexity**: Community bank, regional, or large complex — governs scenario count and severity
- **Currencies**: Single-currency or multi-currency book
- **Custom concerns**: Any specific risks to stress (deposit beta assumptions, embedded optionality, non-maturity deposit behavior)

If regulatory framework is unspecified, default to the six BCBS/interagency standard shocks plus two custom scenarios. If the base curve is missing, use a representative current U.S. Treasury curve and flag the assumption.

## Instructions

### Generate the Scenario Suite

Produce each scenario with a consistent structure:
- **Scenario name and type**
- **Shock definition**: Basis-point change at each key tenor (overnight, 3M, 1Y, 2Y, 5Y, 10Y, 30Y)
- **Rationale**: The economic narrative that produces this curve move
- **Deposit/prepayment behavior note**: Key behavioral assumption that materially affects results
- **Expected NII impact direction**: Given the stated balance sheet profile
- **Expected EVE impact direction**: Given the stated balance sheet profile

Calibrate all magnitudes to the institution's size and the regulatory framework. Larger, more complex institutions warrant more severe and more numerous scenarios.

---

**Scenario 1 — Parallel Up**
Uniform upward shift across the entire curve.
- Standard magnitudes: +100 bps, +200 bps, +300 bps (generate all three as sub-scenarios; +200 bps is the primary regulatory shock under interagency guidance, +250 bps under BCBS)
- Rationale: Broad monetary tightening or inflation repricing
- Behavioral flag: Deposit beta assumption is the single largest driver — state the assumed beta explicitly
- NII: Favorable for asset-sensitive, adverse for liability-sensitive

**Scenario 2 — Parallel Down**
Uniform downward shift, floored at a policy-consistent minimum (typically 0% or a slightly negative floor per framework).
- Standard magnitudes: -100 bps, -200 bps, -300 bps, with the applicable rate floor applied
- Rationale: Easing cycle, recession response, flight to quality
- Behavioral flag: Prepayment acceleration on mortgages/callable assets; deposit rate stickiness at the floor
- NII: Adverse for asset-sensitive, favorable for liability-sensitive

**Scenario 3 — Short-Rate Up (Bear Flattener)**
Short end rises sharply, long end rises little or holds — curve flattens from front.
- Standard magnitudes: overnight/3M +200–300 bps, 2Y +150 bps, 10Y +25–50 bps, 30Y flat to +25 bps
- Rationale: Central bank hiking into a market that expects the hikes to slow growth
- Behavioral flag: Funding cost repricing outpaces asset yields on liability-sensitive books
- NII: Typically compresses margin for banks funded short and lending long

**Scenario 4 — Short-Rate Down (Bull Steepener)**
Short end falls sharply, long end falls little or holds — curve steepens from front.
- Standard magnitudes: overnight/3M -200–300 bps, 2Y -150 bps, 10Y -25–50 bps, 30Y flat to -25 bps
- Rationale: Aggressive front-end easing while long-run inflation/growth expectations anchor the long end
- Behavioral flag: Deposit cost relief at the front; asset yields protected if concentrated in longer tenors
- NII: Generally favorable for classic borrow-short/lend-long balance sheets

**Scenario 5 — Bear Steepener**
Long end rises faster than short end — curve steepens with rates rising.
- Standard magnitudes: overnight/3M +25–50 bps, 2Y +75 bps, 5Y +125 bps, 10Y +175 bps, 30Y +200 bps
- Rationale: Rising term premium, fiscal supply concerns, or reflation with anchored policy rate
- Behavioral flag: EVE hit is pronounced — long-duration assets reprice down while funding stays cheap
- EVE: Adverse for long-duration asset books even when NII looks stable

**Scenario 6 — Bull Flattener**
Long end falls faster than short end — curve flattens with rates falling.
- Standard magnitudes: overnight/3M -25–50 bps, 2Y -75 bps, 5Y -125 bps, 10Y -175 bps, 30Y -200 bps
- Rationale: Recession pricing, flight to duration, long-run growth pessimism
- Behavioral flag: Prepayment spike on the asset side; reinvestment risk on maturing assets
- EVE: Favorable mark on long-duration assets; NII pressure if front-end funding stays elevated

**Scenario 7 — Curve Twist / Inversion**
Short end up, long end down (bear-flattener taken to inversion) — or the reverse.
- Standard magnitudes: overnight/3M +150 bps, 2Y +50 bps, 5Y 0 bps, 10Y -75 bps, 30Y -125 bps
- Rationale: Late-cycle hiking into an economy the long end believes will slow — classic recession signal
- Behavioral flag: Maximum pressure on borrow-short/lend-long margins; tests deposit beta and asset duration simultaneously
- NII/EVE: Often the most punishing NII scenario for community banks

**Scenario 8 — Gradual Ramp (Non-Instantaneous)**
Rates move over the modeling horizon rather than as an instantaneous shock.
- Standard magnitudes: +200 bps parallel phased in over 12 months (e.g., +50 bps per quarter)
- Rationale: More realistic NII scenario than an instant shock; captures repricing timing and lag effects
- Behavioral flag: Repricing schedule and lag assumptions dominate results — document the ramp path
- NII: Best paired with the instantaneous parallel-up to bracket the realistic range

### Scenario Set Summary Table
After the individual scenarios, produce a consolidated table with columns: Scenario | Type | Short-End Δ | Long-End Δ | Primary Metric Stressed (NII/EVE) | Expected Direction (given the stated balance sheet). This is the load-ready reference the analyst hands to the modeling team.

### Calibration and Governance Notes
Close with:
- Which scenarios are regulatory-mandated vs. supplementary under the stated framework
- Recommended reporting frequency and which scenarios drive the primary risk limits
- The two or three assumptions (deposit beta, NMD behavior, prepayment speed) that most affect the results and should be documented alongside every run

## Output Format
- **Structure**: 8 named scenarios, each with the six-part structure; followed by a consolidated summary table and a governance notes section
- **Length**: 1,100–1,500 words
- **Format**: Structured document — named scenario blocks with labeled sub-fields, plus one summary table
- **Sections**: Scenario suite (8 scenarios) → Scenario set summary table → Calibration and governance notes
- **Tone**: ALM specialist — precise, quantitative, framework-aware; every magnitude stated in basis points and defensible to an examiner

## Quality Checklist
Before delivering output, verify:
- [ ] All 8 scenarios are present, each with tenor-level basis-point shocks (not vague "rates rise")
- [ ] Each scenario names the specific behavioral assumption (deposit beta, prepayment, or NMD) that most affects its result
- [ ] Regulatory-mandated scenarios are explicitly flagged and match the stated framework's standard shock set
- [ ] Expected NII and EVE directions are stated relative to the specific balance sheet profile provided, not generically
- [ ] The summary table is complete with one row per scenario and short-end/long-end deltas
- [ ] A rate floor is applied to all downward scenarios consistent with the framework

## Notes
- The instantaneous parallel and steepener/flattener scenarios drive most regulatory IRRBB limits; the gradual ramp and twist scenarios are where real balance sheet vulnerabilities usually surface first
- Deposit beta is the highest-leverage assumption in the entire suite — a scenario set is only as credible as its beta assumptions, so surface them explicitly rather than burying them in model defaults
- For community banks, the curve twist/inversion scenario is frequently the binding NII constraint and deserves standing attention even when not regulatorily mandated
- Pair every instantaneous shock with its gradual-ramp counterpart when the audience is ALCO — the bracket between them is more useful for decision-making than either point estimate alone

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## How to use this skill

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