Abstract
Interest rate risk -- broadly defined as the potential for adverse changes in earnings or capital as a result of a potential change in interest rates -- tends to refer to the banking book. Interest rate risk exposures can result from changes in spreads between asset and liability yields. These spreads can arise from differences in basis curves, they may be attributable to embedded options, or they may result from differences in maturities or repricing periods. The interest rate risk exposure comes specifically from differences in repricing period between the bank's assets and liabilities. This article seeks to develop intuition about the meaning of interest rate risk and then establish a framework for applying that intuition. At a minimum, the use of a gap report and the intuition it provides can help increase understanding about the nature and potential direction of current and future earnings and capital and help enrich internal discussions on strategy.