Asset-Liability Management (ALM) teams use two distinct analytical perspectives to quantify and manage interest rate risk across the non-trading book.

The EaR approach analyzes the short-term impact of interest rate movements on the bank’s net interest income over a 12-to-24-month horizon. It provides immediate visibility into how interest rate shifts will impact near-term earnings reports.

The EVE approach analyzes the long-term structural impact of interest rate movements by measuring changes in the present value of all expected future corporate cash flows:

EVE Net Adjustment = Present Value of Expected Assets - Present Value of Expected Liabilities

[Interest Rate Curve Shocks Activated] ---> Apply Discounting Adjustments Across Accounts ---> Sort Net Present Value Shifts

Supervisors apply standardized interest rate shocks (such as a sudden parallel shift of up to 200 basis points) to evaluate a bank’s EVE stability. If a shock triggers an EVE drop greater than 15% of the bank’s Tier 1 capital, the institution is flagged as an outlier, prompting immediate regulatory intervention.