Dynamic balance sheet
Regulatory Definition
A balance sheet incorporating future business expectations, adjusted for the relevant scenario in a consistent manner.
EBA GL/2022/14
What This Actually Means
Model the balance sheet going forward including new lending, new deposits, and product repricing — all adjusted to be consistent with the rate scenario you're running. If rates rise, your model should reflect lower new mortgage volumes and potentially higher deposit pricing.
Where It Matters
Used primarily for NII and earnings forecasting, not for the EVE SOT. Much more realistic but introduces huge modelling complexity — you need assumptions about new business volumes, pricing strategy, competitive response, and customer behaviour all conditioned on the rate scenario. Garbage in, garbage out risk is significant.
Terminology ambiguity: some practitioners use "dynamic balance sheet" specifically to mean a balance sheet whose composition changes as a function of the rate scenario itself — e.g. lower mortgage volumes in a high-rate environment, or deposit mix shifting toward fixed-term as rates rise. This is subtly different from the regulatory definition, which simply means incorporating future business expectations. When someone says they're running a dynamic balance sheet, it's worth clarifying whether they mean (a) a balance sheet that grows with new business, or (b) one where the product mix and volumes are explicitly rate-conditioned. The two are not mutually exclusive but the modelling implications are very different.