GAP ANALYSIS Negri M. A. , 53706/1 (1)
Definition Gap analysis – a method of asset-liability management that can be used to assess interest rate risk or liquidity risk excluding credit risk. Gap analysis is a simple IRR measurement method that conveys the difference between rate sensitive assets and rate sensitive liabilities over a given period of time. 2
Gap = RSA – RSL, where: RSA – rate sensitive assets; RSL – rate sensitive liabilities. Positive gap: financing of RSA by fixed RSL. Negative gap: fixed RSA financed by RSL. 3
Rate sensitive assets/liabilities • Assets/Liabilities repriced within a short period of time; • The short time duration can be defined as 1 year. 4
Measure of interest rate risk Gap analysis: - negative gap: decreasing interest rates -> increasing net interest income; - positive gap: increasing interest rates -> increasing net interest income; - zero gap: changing the interest rates on the same value won’t affect net interest income. 5
Interest rate change and impact on income Change in net interest income = change in (rate * gap). Conservative bank: - maintains positive gap; - gains from increase in interest rate. Aggressive bank: - maintains negative gap; - gains from decrease in interest rate. 6
Other gap formulas Relative gap = (RSA – RSL) / Total assets Gap ratio = RSA / RSL 7
Representations of gap Asset sensitive bank: • positive gap amount; • positive relative gap; • gap ratio > 1. Liability sensitive bank: • negative gap amount; • negative relative gap; • gap ratio < 1. 8
Positive gap • • large RSA; asset sensitive; losses if rates fall; favorable situation is when the expectation is increasing rates of interest: - management action will be to increase RSA and/or reduce RSL; - extend liability maturities and/or shorten asset maturities; • not a favorable situation is when the expectation is falling rates of interest: - management action will be to increase RSL and/or reduce RSA; - extend asset maturities and/or shorten liability maturities. 9
Negative gap • • large RSL; liability sensitive; losses if rates rise; favorable situation is when the expectation is decreasing rates of interest: - management action will be to increase RSL and/or reduce RSA; - extend liability maturities and/or shorten asset maturities; • not a favorable situation is when the expectation is increasing rates of interest: - management action will be to increase RSA and/or reduce RSL; - extend asset maturities and/or shorten liability maturities. 10
