Examines the negative aspects of interest rate shifts for banking institutions.

Interest rate risk is included in the larger category of market risk, to which a bank, like any financial institution, is subject. A move in any such risk can result in profit or loss for the bank, however; this paper deals with the loss aspects correlated with risk. The paper discusses concepts such as Value-at-Risk, structural interest rate risk, and the GAP technique.

“A technique of managing interest rate risk that has been used for some time now is the GAP technique or the GAP model. This derives its name from the difference (gap) between the asset value and liabilities value that is at the center of this model. Thus, the GAP model takes into consideration the assets sensitive to interest rate risk and the liabilities sensitive to interest rate risk and calculates the difference between the two. The bank must supply the length of time over which the analysis is to be done (usually one year), a certain interest rate forecast for the period of time over which the analysis is done and a decision whether to preserve the current net interest income or attempt to improve it.”