Capital Markets School - October 2023

Internal Use Only

Short-term vs. Long-term IRR

• Earnings ‐ at ‐ risk simulations • NII and NI • GAP

Short ‐ term IRR Measurements

• Equity ‐ at ‐ risk • Economic Value of Equity (EVE) • Duration

Long ‐ term IRR Measurements

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Internal Use Only

Earnings-At-Risk: Short-Term IRR • Earnings-at-risk is a measurement of how much the bank’s margin could change given a change in interest rates.

• Short-term = 1 year or less.

• Short-term interest rate risk is measured by initially establishing a one year earnings forecast (which may include a dynamic market rate forecast, earnings growth, and balance mix & volume changes). • The earnings at risk is the negative change between the base forecast and one of the "shock" scenarios. The measure is usually stated as a percentage change from the base income.

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