The risk (market risk) that affects the value of assets or liabilities outside the trading book (of an entity, e.g., a bank), or the risk that affects income due to changes in market prices such as interest rates, foreign exchange rates and equity prices, or from changes in managed rates.

It constitutes the risk that the current or future exposure in the banking book (i.e. non-traded book) will negatively an entity’s capital and/ or income due to adverse movements in certain market variables such as interest rates, foreign exchange rates, equity prices, etc.

The main sources of balance sheet risk (non-traded market risk) are interest rate risk, credit spread risk, foreign exchange risk, equity risk and accounting volatility risk.

Balance sheet risk may also refer to the risk that impact earnings and capital from mismatches between interest-bearing assets and liabilities due to the varying maturity and repricing profiles, and from term mismatches. It may also be driven by non-functional monetary assets and liabilities on any entity’s balance sheet denominated in a currency other than its functional currency. These monetary assets include line items such as accounts receivable (A/R), accounts payable, cash, and loans.