Market risk is associated with interest rate fluctuation and foreign exchange rate fluctuation. Market risk originates from the mismatch of the assets and liabilities mix of the bank. Since it directly affects the income which in turn affects the value of shareholders. When the market is volatile and interest rates are not stable, the income from assets and payment on liabilities varies. Banks need to take into account the assets mix and liabilities backing those assets. The effect will different under different scenarios. When interest rate is rising and the asset and liabilities are booked on fixed rates and shall be re-priced at equal intervals there will be no effect on net income. When the interest rate is rising and the asset and liabilities are booked on floating rates and the assets and liabilities are supposed to be re-priced at an equal interval, there will be no effect on net income. When the interest rate is falling and the asset and liabilities are booked on fixed rates and the assets and liabilities will be re-priced at an equal interval, with no change in net income. When the interest rate is falling and the asset and liabilities are booked on floating rates and the assets and liabilities will be re-priced at equal intervals, with no change in net income.

 The risk arises when the interest rate is rising and the assets are re-priced in the short term and liabilities are re-priced in the longer term. In this situation, income will rise positively. But when the interest rate is rising and the assets are re-priced at the long term and liabilities are re-priced at the short term, the income will fall.

 Foreign exchange rate risk is involved when banks maintain assets and liabilities in foreign currencies. The foreign exchange rate can be transactional as well as translations. Foreign currency assets and liabilities holdings will be affected positively/ negatively by the changes in the daily rate of exchange and by the translation of foreign currencies assets and liabilities at the year's end when preparing accounts.