Document ID: chunk:federal_register_of_legislation:F2023L00690:front:0:p6
Version: federal_register_of_legislation:F2023L00690
Segment Type: other
Provision Reference: 
Character Range: 13645–16533

other related entity, rather than on its own balance sheet. Detailed information on the treatment of an 'Extended Licence Entity' (ELE) is set out in Attachment C.

Real interest rate stress
    31.         This stress measures the impact on the capital base of a regulated institution from changes in real interest rates.
    32.         Real interest rates are the portion of the nominal risk-free interest rates that remain after deducting expected CPI inflation.
    33.         All assets and liabilities whose values are dependent on real or nominal interest rates must be revalued using the stressed real or nominal rates.
    34.         The stress adjustments to real interest rates are determined by multiplying the greater of three per cent or the nominal risk-free interest rates by 0.25 (upward stress) or by -0.20 (downward stress). The stress adjustments must be added to the nominal risk-free interest rates. The stress adjustments must also be added to real yields if these are used explicitly in the valuation of an asset or liability (e.g. inflation-indexed bonds). Post-stress real yields may be negative.
    35.         The maximum stress adjustment is 200 basis points in either direction. The minimum upward stress is 75 basis points and the minimum downward stress is 60 basis points. Nominal risk-free interest rates and real yields may be negative after applying the downward stress adjustment.
    36.         The regulated institution must calculate the impact on the capital base of an upward movement and a downward movement in real interest rates. The impact of each calculation must not be less than zero. Both impact calculations must be used for the purposes of the aggregation formula in paragraph 78.

Expected inflation stress
    37.         This stress measures the impact on the capital base of changes to expected Consumer Price Index (CPI) inflation rates. The expected inflation stress also affects nominal interest rates. The expected inflation stress does not apply to assets that are affected by the property or equity stresses.
    38.         In each scenario, assets and liabilities whose values are dependent on expected inflation or nominal interest rates must be revalued using the stressed expected inflation or nominal interest rates.
    39.         The stress adjustments to expected inflation rates are an increase of 125 basis points and a decrease of between 50 and 100 basis points. A downward stress of 50 basis points applies when the nominal risk-free interest rate is negative. A downward stress of 100 basis points applies when the nominal risk-free interest rate exceeds one per cent per annum. If the nominal risk-free interest rate is between zero and one per cent per annum the downward stress is determined as the sum of 50 basis points and half of the nominal risk-free interest rate. The stress adjustments must be