Interest rate risk was traditionally called Asset-Liability Management (ALM), and was seen as the use of a decision-making process to the matching or partial matching of the asset and liability 'mix' of an organisation. It involves liquidity risk, as well as making funding and/or asset-related decisions in order to impact either of accounting earnings (net interest income – the accounting or management perspective), or the maximisation of value (economic earnings - the shareholder perspective).

It can also be viewed as a means of approximating the business risk in financial terms, by way of a structured approach. Whilst interest rate risk was traditionally viewed as in some way distinct from the other risk types, it is now more likely to be measured and reported together with credit, market and operational risk. Much care must be used to ensure consistency of approaches across risk types, especially when developing an economic capital model.

Our quantitatively oriented team enables us to operate comfortably within the “economic” model of interest rate risk, which is the approach that most closely aligns with modern measures of other risk types.

The techniques we use to measure interest rate risk range from the relatively simple and static (pricing and liquidity gap analysis), through to the more sophisticated and dynamic VAR-type approaches.