Learn More: Effect of a Gap

A tool used to judge a bank’s earnings exposure to interest rate movements is called a gap report. A bank’s gap over a given time period is the difference between the value of its assets that mature or reprice during that period and the value of its liabilities that mature or reprice during that period. If this difference is large (in either a positive or negative direction), then interest rate changes will have large effects on net interest income. In the table below, the term “rate sensitive” indicates the amount of assets or liabilities whose interest rates will change during selected time intervals.

Rate Sensitive Assets $ million Rate Sensitive Liabilities $ million Gap Change in Net Interest Income from change in interest rates
20
2
$20,000
   

Figure 1 Effect of Gap Size on Change in Net Interest Income

To see the effect of different gap positions given a one percent rise in interest rates, select different values for rate-sensitive liabilities from the drop-down menu in the second column above.

For example, lower the value for rate-sensitive liabilities to 16. Notice that the maroon bar in the left chart gets smaller, because rate-sensitive assets remained unchanged. The growing difference between the height of the two bars means a widening gap. As the gap widens, the change in net interest income grows in the chart on the right, telling us that the larger the gap position of a bank, the greater the potential change in net interest income for any change in interest rates. In these charts, the interest rate change is assumed to be one percent.

A gap analysis measures timing differences in the repricing (interest rate changes) of assets and liabilities to identify the exposure of net interest income. The greater these timing differences, the greater the bank’s risk of loss from interest rate changes. You can use knowledge about your bank’s gap position to determine how its net interest income and, hence, its net income may be influenced by changes in interest rates.