Measuring Interest Rate Risk for the Banking Book

This article first defines interest rate risk. Next, a survey of the interest rate environment of banks is carried out to identify the sources of interest rate risk. Greater volatility in interest rates, greater sensitivity of bank liabilities to interest rate differentials, and shifts in composition of bank asset and liability portfolios are some of the sources identified. The methods of calculation of interest rate risk are outlined next and the international guidelines on interest rate risk are surveyed.