Analyze and distinguish sources of interest risk.

Interest rate risk. Is the risk to income or capital

arising from fluctuating interest rates. Changes in interest rates
affect a banks earnings by changing its net interest income
and the level of other earnings. Changes in interest rates also
affect the basic value of the banking corporations assets,
liabilities and off- balance sheet financial instruments because
the present value of future cash flows change when interest
rates change. Banking business face interest rate risk in several
ways, including repricing risk, yield curve risk, basis risk, and
optionality risk.

Repricing risk, this is the first and most discussed

form of interest rate risk arises from timing differences in the
maturity and repricing of banking business assets, liabilities
and off-balance sheet positions. Such repricing inequity may
expose a banks income and economic value to unexpected
fluctuations as interest rates differ.

Optionality risk, is the cause of interest rate risk

arising from a change in the outlook or timing of a financial
instruments cash flows caused by changing market interest
rates. This risk arises from the options planed in many banking
corporation assets and liabilities. These options provide the
holder the right, but not the obligation, to buy, sell or in some
way change the cash flow of the financial instrument.

Yield curve risk, yield curve risk arises when

unexpected shifts of the yield curve have negative effects on a
banking corporations income or economic value. The yield
curve may shift due to changing relationships between interest
rates for different maturities of the same index or market.
These changes will be evident in the slope or shape of the
curve.

Basis risk, this is the risk originating from imperfect

relation in the changes of interest rates in different financial
markets or on different instruments with otherwise similar
repricing characteristics. Differences in interest rate changes
can give rise to unpredicted changes in the cash flows and
earnings spread between assets, liabilities and off-balance
sheet instruments of similar maturities or repricing frequencies.

As the discussion above suggests, changes in interest

rates can have negative effects both on a bank's earnings and
its economic value. This has given rise to two separate, but
corresponding overview for assessing a bank's interest rate risk
liability. The perspectives are earnings perspective, In the
earnings perspective, the center of analysis is the effect of
changes in interest rates on accumulated or reported earnings.
This is the traditional approach to interest rate risk assessment
used by many banks. And economic value perspective, change
in market interest rates can also affect the economic value of a
bank's assets, liabilities and off-balance sheet positions.
REFERENCE;

http://ifci.ch/138860.htm

http://www.boi.org.il/en/BankingSupervision

https://www.occ.gov/publications