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Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

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Reading the repricing bucket

If the repricing gap does provide some useful information on the mismatching of assets and liabilities, it does not yet offer a direct assessment of the interest rate risk faced by a bank.

What the ALCO wants to know is the effect of a change of interest rate, say 1%, on the net interest margin or the profit of the bank. If the interest rate changes, do we lose the entire earnings of the year or only a small part?

A very useful concept, the earnings-at-risk (EAR), will provide this information.

Example

In the case of the first quarter gap of –310, the impact of an increase of 1% on the net interest margin of the quarter will be measured as follows:[3]

The EAR is very useful information to senior members of ALCO ...

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