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 increase, liab🎶ilities 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开奖号码历史查询:interest rate gaps, are also known as duration gap.

Understanding a Negative Gap

Negative gap is related to 澳洲幸运5开奖号码历史查询: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开奖号码历史查询: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开奖号码历史查询: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开奖号码历史查询:commercial loans, mortgages and securities, and its expenses (e.g., interest paid out on&nb꧒sp;deposౠits).

Negative Gap and Asset-Liability Management

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

澳洲幸运5开奖号码历史查询:Gap analysis, as a method of 澳洲幸运5开奖号码历史查询:asset-liability management, can be helpful in assessing 澳洲幸运5开奖号码历史查询:liquidity risk. In general, the concept of asset-liability 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 in💮flows from the assets.

Asset-liability management is also concerned with the availability of assets to pay the liabilities, and when the assets 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开奖号码历史查询:cash flows, and some assets and liabilities will have cash flow patterns that are no꧑t☂ consistent.