The article examines how German banks manage interest and credit risks using data from a survey of small and medium-sized banks. They studied the impact of a 200-bp interest rate increase and found that banks faced larger losses in bond portfolios than income reductions in the first year. Banks offset losses by using hidden reserves and those using interest derivatives had lower losses. Banks are compensated for taking on interest rate and credit risks, and they try to stabilize their net interest margin by managing these risks. Overall, banks allocate their risk budget to either interest rate or credit risk.