A risk measure (at-risk measure) that constitutes an ex-ante estimate of changes in an entity’s earnings over the next twelve months in response to interest rate change by 100 basis points (bps)- i.e., 1%- in either direction (downward or upward). Earnings at risk (EAR) is a risk management tool that is used by banks and other financial entities to manage the risks associated with net interest income, (NII).

This kind of risk measures is used as part of short-term interest sensitivity analysis. Most financial institutions have to perform and disclose this analysis to facilitate comparisons between peer institutions operating in the same sector.

EAR is reflective of the amount by which net income may change due to a change in interest rate (exemplified in a certain interest rate benchmark) over a given period of time. As a measure of value at risk (VaR), EAR is a statistic that measures and quantifies the degree of risk for a position/ portfolio/ fund or within a firm over a specific time period. It shows the impact of market risk on the income statement in view of the effect of interest rate changes on income.

It can be defined as a certain number of standard deviations of the distribution of earnings.