This chapter provided an in-depth look at the measurement and on-balance-sheet management of interest rate and insolvency risks. The chapter first introduced two methods to measure an FI's interest rate gap and thus its risk exposure: the repricing model and the duration model. The repricing model concentrates only on the net interest income effects of rate changes and ignores balance sheet or market value effects. As such it gives a partial, but potentially misleading, picture of an FI's interest rate risk exposure. The duration model is superior to the simple repricing model because it incorporates the effects of interest rate changes on the market values of assets and liabilities. The chapter concluded with an analysis of the role of an FI's capital in insulating it against credit, interest rate, and other risks. According to economic theory, shareholder equity capital or economic net worth should be measured on a market value basis as the difference between the market value of an FI's assets and liabilities. In actuality, regulators use a mixture of book value and market value accounting rules. For example, FIs are required to mark-to-market investment securities held as trading assets, while being able to carry most loans at their book values. This mix of book value and market value accounting for various assets and liabilities creates a potential distortion in the measured net worth of the FI.