Financial and each of its subsidiary banks generally increased by a small amount during 2001 as retained capital was used to support asset growth. See Note 16 to the Consolidated Financial Statements for additional information regarding regulatory capital. actions by regulators that could have a material effect on operations. These capital requirements include quantitative measures of assets, liabilities and off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators. The capital ratios for BOK pose significant market risk to BOK Financial. The responsibility for managing market risk rests with the Asset/Liability Committee that operates under policy guidelines established by the Board of Directors. The negative acceptable variation in net interest revenue and economic value of equity due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%. These guidelines also establish maximum levels for short-term borrowings, short-term assets and public and brokered deposits and establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is reviewed monthly. Market risk is a broad term for the risk of economic loss due-to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading or held for purposes other than trading. BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its portfolio of assets held for purposes other than trading and trading assets. The effect of other changes, such as foreign exchange trates, Commodity prices or equity prices do not BOK Financial performs a ‘sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions on net interest revenue, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next twelve months based on three interest rate scenarios. These are a “most likely” rate scenario and two “shock test” scenarios, the first assuming a sustained parallel 200 basis point increase and the second a sustained parallel 100 basis point decrease in interest rates. Management historically evaluated interest rate sensitivity for a sustained 200 basis point decrease in interest rates. However, the results of a 200 basis point decrease in interest rates in the current Jow-rate environment are not meaningful. An independent source is used to determine the most likely interest rates for the next year. The Federal Reserve Bank’s discount rate affects short-term borrowings, the prime lending rate and the LIBOR. These rates in turn are the’basis for much of the variable-rate loan pricing. Additionally, the 30-year mortgage rate directly affects the prepayment speeds for mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. Sensitivity of fee income to market interest rate levels, such as those related to cash management services and mortgage servicing are also included. The model incorporates assumptions regarding the level of interest rate or balance changes on indeterminable maturity deposits (demand deposits, interest-bearing transaction accounts and savings accounts) for a given level of market rate changes. The assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Interest rate swaps on all products are included to the extent that they are effective in the 12-month simulation period. Changes in prepayment behavior of mortgage-backed securities and residential mortgage loans and mortgage servicing in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio: The effect of changes in interest rates on the value of mortgage servicing rights is excluded from Table 21 due to the extreme volatility over such a large rate range. The effect of changes in interest rates on the value of mortgage servicing rights and hedge securities is shown in Table 22. The impact of planned growth and new business activities is factored into the simulation model. At December 31, 2001 and 2000, this modeling indicated interest rate sensitivity as follows: (Dollars in Thousands) Decrease 200 bp Increase 100 bp 200 bp Most Likely 2001 2000 2001 2000 2001 2000 Anticipated impact over the next twelve months: Net interest revenue $7,380 $ (199) $ (10,403) $2,269 $3,896 $3,837 2.0% (0.1)% (2.8) % 0.7% 1.1% 1.3% Net income $4,612 $ (124) $ (6,502) $1,418 $2,435 $2,398 3.3% (0.1)% (4.6) % 1.3% 1.7% 2.1% Economic value of equity $ 705 $(32,142) $(109,487) $(10,113) $ (398) $33,255 0.1% (2.8)% (8.5) % (0.9)% - 2.9% Table 21 Interest Rate Sensitivity 25 Interest Rate Risk Management (Other than Trading) Market Risk