Capital Markets School - October 2023

Internal Use Only

Relationship Between EAR and EVE • How can the bank have earnings exposure to rates down, but EVE exposure to rising rates (or vice versa)? • The bottom line answer is that earnings-at-risk measures short-term risk exposure, and EVE-at-risk measures long-term risk exposure. • It comes down to a short-term/long-term trade-off. • For example, buying longer-term 7-10 year bonds will probably have a positive impact on your overall margin today and in the immediate future (because it creates more spread). But continue that strategy long enough in a rising rate environment and your gains from investing longer-term will be eaten up by rising funding costs over time.

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Internal Use Only

Rating Sensitivity to Market risk

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