Basis risk
Regulatory Definition
Risk arising from the impact of relative changes in interest rates on interest rate sensitive instruments that have similar tenors but are priced using different interest rate indices. Basis risk arises from the imperfect correlation in the adjustment of the rates earned and paid on different interest rate sensitive instruments with otherwise similar rate change characteristics.
EBA GL/2022/14
What This Actually Means
You've got assets and liabilities that both float, but they're linked to different benchmarks or reprice at different speeds. Your mortgages are on SONIA but your funding is on EURIBOR, or your tracker mortgages reset annually but your swaps reset quarterly. When the spread between these indices moves, you're exposed.
CRITICAL: Before measuring basis risk, determine what's already captured in your gap risk framework. If your NII model already uses behavioural repricing with modelled betas (e.g. sight deposits at beta 0.6), that partial pass-through IS a form of basis risk — it's just been captured as gap risk. Basis risk measurement should only capture the residual exposure not already embedded in your repricing assumptions.
Where It Matters
The double-counting trap. Banks can build gap risk and basis risk models as separate scenarios. Deposits are modelled repricing at a behavioural beta against a central bank rate in NII scenarios. By virtue of having a beta less than one your earnings sensitivity already captures basis risk from the beta.
If your gap model already uses behavioural repricing with modelled betas, the additive basis risk shrinks significantly, it's only the residual: index mismatches (Risk Free Rates vs ), tenor mismatches (3m vs 6m), and the risk that your modelled beta is wrong.
The danger: a Pillar 2 capital number that sums gap risk and basis risk without reconciling the overlap overstates the real exposure.