Earnings at risk (EaR) / Annual earnings at risk (AEaR)
Regulatory Definition
The potential decline in net interest income over a specified horizon under adverse interest rate scenarios. Also referred to as Annual Earnings at Risk (AEaR) when the horizon is specifically one year. Note: EaR as defined here is scoped to NII — it does not capture all earnings items that may be interest rate sensitive.
EBA GL/2022/14
What This Actually Means
If rates move against you, how much less NII will you earn over the next 12 or 24 months compared to your base case? It's the earnings equivalent of EVE sensitivity — but focused on near-term profitability rather than lifetime value. When the horizon is fixed at one year, this is often labelled AEaR — a common convention in ICAAP submissions and board risk appetite frameworks.
NII vs. broader earnings sensitivity: EaR is specifically scoped to net interest income — interest earned minus interest paid on instruments accounted for as NII. This is narrower than a full earnings sensitivity measure, which could also capture fee income that varies with rate levels, AT1 coupon payments (which are discretionary and not accounted for as NII but are interest rate-linked), and other P&L lines that move with rates but sit outside the NII line. Where a bank runs a broader earnings sensitivity measure alongside EaR, it is important to be clear which P&L items are included in each metric and to avoid double-counting between them.
Where It Matters
Banks often run EaR under multiple scenarios — parallel shifts, steepeners, flatteners, and bespoke stress scenarios. The results feed directly into ICAAP and board risk appetite limits. The gap between EaR and EVE sensitivities tells you a lot about the maturity profile of the book.
Scope creep between NII and earnings sensitivity: in practice the boundary between EaR and broader earnings sensitivity is not always clearly maintained. Fee income on rate-linked products, AT1 dividends, and other non-NII P&L items can find their way into sensitivity models without being explicitly flagged as outside the NII definition. This creates comparability problems — two banks reporting EaR may be measuring different things — and can obscure the true NII exposure if non-NII items are partially offsetting rate sensitivity that should be visible. The metric definition and its P&L perimeter should be documented and consistently applied across scenarios and reporting periods.
How much NII you could lose in adverse rate scenarios over a defined horizon.