What Is Static Gap?

Static gap is a measure of exposure or sensitivity to interest rates, calculated💎 as t🅘he difference between assets and liabilities of comparable repricing periods. 

How Static Gap Works

Static gap is a measure of the gap between assets (money held) and 澳洲幸运5官方开奖结果体彩网:liabilities (money loaned out or sensitive to interest) at a set moment in time. Minus signs, or a negative value, in the calculated gap indicate a greater number of liabilities than assets maturing at that particular maturity.

This type of analysis is commonly used in the banking industry. A bank borrows funds at one rate and loans the money out at a higher rate, with the gap, or difference, between the two representing its profit.

Static gap can be calculated for short-term, long-term, and multiple time periods. Usually, it is calculated for time frames of less 💧than a year—often 0 to 30 days or 31 to 90 days.

Example of Static Gap

Suppose a bank has both $5 million in assets and $5 million in liabilities that reprice in any given time window. Changes in interest rates should not change the bank's 澳洲幸运5官方开奖结果体彩网:net interest margin (NIM)—the interest it earns compared to the amount of interest paid out to its lenders. 🐼This scenario would represent a balanced gap position.

꧙ If instead, $12 million in assets reprice with only $6 million in liabilities repricing, the bank will find itself in an asset sensitive position. In this case,🦂 an asset sensitive bank will benefit from a NIM increase if interest rates rise.

𒁃 In contrast, if only $5 million in assets reprice during the same period that $8 million in liabilities reprice, it is known as a liability sensitive position. Here, if interest rates rise, NIM🎀 will decline. Similarly, if interest rates fall the liability-sensitive bank will project a wider NIM.

Limitations of Static Gap

A negative gap doesn’t necessarily always spell bad news for 澳洲幸运5官方开奖结果体彩网:financial institutions (FIs). Yes, when interest rates fall banks earn less from 澳洲幸运5官方开奖结果体彩网:interest-sensitive assets. Howeꦬver, they also pay less on their interest-re✨lated liabilities.

In reality, banks that have a higher level of liabilities than assets are the ones that see more of a strain on their 澳洲幸运5官方开奖结果体彩网:bottom line from a negative gap.

There's also the static gap's oversights to take into consideration. Simple static gaps are inherently imprecise measurements because they do not take into account factors such as interim cash flow, average maturity, and 澳洲幸运5官方开奖结果体彩网:prepayment of the loan.

A common, and glaring, hole in 澳洲幸运5官方开奖结果体彩网:gap analysis is its inability to account for the optionality embedded in many assets and liabilities. If rates drop and assets prepay faster than expected, or if rates rise and the average life of assets is unexpectedly extended, these conꦐtingencies are typically not a component of simple sta༺tic gap reporting and analysis. 

Other issues arise for non-maturity deposits. Certain deposits are carried in 澳洲幸运5官方开奖结果体彩网:perpetuity, paying for an infinite amount of time.

Static Gap vs. Dynamic Gap

Static gap analysis focuses on the difference between assets and liabilities at one moment in time. 澳洲幸运5官方开奖结果体彩网:Dynamic gap, on the other hand, attempts to measure the gap as time passes and financial 澳洲幸运5官方开奖结果体彩网:obligations change.

Rather than taking a snapshot, this alternative method attempts to track the constant expanding and contra✤cting gap as bank accounts are opened and closed and loans offered to customers and owed to other FIs are approved and paid back.