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