Contact: Rosie Cataldo 612-204-5261 Date: July 24, 2000 FOR IMMEDIATE RELEASE

Attention Banking Media

The following article appears in the July 2000 issue of the fedgazette:

Interest rate risk: What is it, why banks would want it and how to evaluate it

By Ron Feldman, Assistant Vice President, Banking Supervision
and Jason Schmidt, Financial Analyst

This article discusses recent indications that the level of interest rate risk (IRR) which banks face in the Ninth District, and in the country, has increased. IRR is the potential for changes in interest rates to reduce a bank's earnings and lower its net worth. Evidence on IRR increase comes from examinations of banks and from models that show increased sensitivity on the part of banks to a change in interest rates.

Since IRR holds the potential to have a negative impact on earnings and net worth of a bank, why don't banks try to eliminate it by ensuring all of their assets have the same maturities? The authors answer this question and go on to offer some suggestions for managing IRR. In addition, they offer explanations for the recent increase in IRR.

Note: The fedgazette, a quarterly publication of the Federal Reserve Bank of Minneapolis, regularly features an article on banking trends. See an index of all fedgazette articles.

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