What Is a Negative Gap?

A negative gap is a situation where a financial institution's interest-sensitive liabilities exceed its interest-sensitive assets. A negative gap is not necessarily a bad thing, because if interest rates decline, the entity's liabilities are repriced at lower interest rates. In this scenario, income would increase. However, if interest rates incre𒀰ase, liabilities would be repriced at higher interest rates, and income would decrease.

The opposite of a negative gap is a positive gap, where an entity's interest-sensitive assets exceed its interest-sensitive liabilities. The terms of negative and positive gaps, which analyze 澳洲幸运5官方开奖结果体彩网:interest rate gaps, are also known as duration gap.

Understanding a Negative Gap

Negative gap is related to 澳洲幸运5官方开奖结果体彩网:gap analysis, which can help determine a financial institution's interest-rate risk as it relates to repricing, i.e. the change in 澳洲幸运5官方开奖结果体彩网:interest rates when an interest-sensitive investment matures.

The size of an entity's gap indicates how much of an impact interest rate changes will have on a bank's 澳洲幸运5官方开奖结果体彩网:net interest income. Net interest income is the difference between an entity's revenue, which it generates from its assets, including personal and 澳洲幸运5官方开奖结果体彩网:commercial loans, mortgage🔯s and securities, and its expense✨s (e.g., interest paid out on deposits).

Negative Gap and Asset-Liability Management

A negative gap is not necessarily either good or bad, bu⛄t it is a measure of how much a bank is exposed to interest-rate risk. Understanding thiꦍs metric is a component of asset-liability management, which banks must consider in their operations.

澳洲幸运5官方开奖结果体彩网:Gap analysis, as a method of 澳洲幸运5官方开奖结果体彩网:asset-liability management, can be helpful in assessing 澳洲幸运5官方开奖结果体彩网:liquidity risk. In general, the concept of asset-liabiliไty management focuses on the timing of cash flows. It looks at when cash inflows are received versus꧂ when payments on liabilities are due and when the liabilities present a risk. It aims to ensure that the timing of liability payments will always be covered by cash inflows from the assets.

Asꦕset-liability management is also concerned with the availability of assets to pay the liabilities, and when the as💫sets or earnings may be converted into cash. This process can be applied to a range of categories of balance sheet assets.

When the duration gap is zero, meaning there is no positive gap or negative gap, a firm's equity is thought to be protected against interest-rate risk because any increases or decreases in interest rates won't affect the firm. However, achieving a zero gap is difficult as not all assets and liabilities have matching durations, customer prepayments and defaults will affect the timing of 澳洲幸运5官方开奖结果体彩网:cash flows,🍸 and some assets and liabilities will have c🐷ash flow patterns that are not consistent.