What it means
A static balance-sheet view holds the current positions as the starting exposure, while a dynamic approach considers how those positions and future business can evolve. Loan repayments, new lending and deposit flows can alter the risk profile before a projected rate change fully affects earnings.
The OCC interest-rate risk handbook distinguishes static and dynamic earnings models, noting that static models assume no growth while dynamic models use assumptions about business changes and management and customer behaviour, and it discusses gap reports as one measurement tool among several. A gap should be defined before it is calculated.
Repricing-sensitive assets in one time bucket differ from total assets, and rate-sensitive liabilities differ from all liabilities, so a balance-sheet surplus does not alone reveal interest-rate exposure. Timing matters because products reset at different dates: a loan can mature late but reprice earlier, while a deposit can remain outstanding but have a rate adjusted quickly, so contractual maturity and effective repricing should not be treated as identical.
New business assumptions can change the result, since a bank forecasting more fixed-rate lending may build a different exposure from one expecting floating-rate loans. Projected growth should have support rather than be used merely to make risk appear smaller.
Deposits require behavioural assumptions as well, because customers can withdraw funds or demand different rates and management can adjust pricing, so the model should show how those choices affect funding costs and balances under different scenarios. Prepayments can alter asset cash flows, since borrowers may refinance or repay when incentives change, and an analysis based only on scheduled maturity can miss that option-related response.
Basis risk remains distinct, because asset and liability rates may reference different benchmarks or respond by different amounts. A matched repricing total does not prove equal changes in interest received and paid.
A dynamic forecast can hide current exposure, as optimistic assumptions about future hedging, lending or funding may offset a risk already present, and the OCC therefore discusses using static results alongside dynamic simulations rather than relying on one reassuring projection. Model horizon matters too, since longer forecasts require more assumptions about business and market conditions.
A precise-looking number several years ahead can carry substantial uncertainty even when the calculation is mechanically correct. The model should be tested against actual outcomes by comparing projected balances, deposit costs and loan behaviour with subsequent experience, and that review should distinguish a wrong scenario from a coding or data error.
For a non-finance manager overseeing a bank, ask how the gap is defined and which future behaviours drive the result. Compare static and dynamic views, test adverse conditions, and treat the analysis as scenario-based risk measurement, not a complete estimate of liquidity or solvency.
In practice
Real-world examples.
Example
A bank projects growing fixed-rate loans funded by deposits with faster rate changes. Risk staff model how the exposure evolves over the next two years instead of relying on today's asset and liability totals. The projection shows the gap widening as the fixed-rate book grows.
Example
A forecast assumes customers leave deposits unchanged after a rate rise. The committee requests a scenario with faster withdrawals and higher deposit pricing before accepting the projected earnings. The adverse scenario shows a materially lower margin.
Example
Management expects future hedges to reduce a repricing gap. The risk team also presents the current unhedged exposure so planned actions do not hide the position already held. The committee approves the hedge only after it is executed.
Formula
Calculation
Simplified bucket gap = rate-sensitive assets less rate-sensitive liabilities in the defined period. If projected assets are $80 million and liabilities $95 million, the gap is minus $15 million. This does not directly equal a loss: rate changes, betas, timing, basis differences and embedded options determine the earnings effect.
As an illustration only, a 1% rise in rates applied to the whole bucket would change annual net interest income by about -$150,000 (-$15,000,000 x 1%), if every item repriced fully and immediately. A dynamic view might assume $10 million of new rate-sensitive assets enter the bucket, so the projected gap becomes -$5 million and the same 1% rise costs about $50,000. That improvement exists only if the new lending actually happens, which is why the static figure stays alongside it.Case study
Seen in the real world.
Fictional case: A bank's dynamic model reports low future risk because it assumes strong deposit retention and rapid new floating-rate lending. Actual growth is slower and deposit costs rise more quickly. The committee compares the result with a static view and revises the assumptions. It keeps planned balance-sheet changes separate from exposures that already exist.
The fictional bank then back-tests its model each quarter, comparing projected deposit balances and loan prepayments with what actually happened. In one review, the differences trace to a data error in the repricing dates, not to the scenario, and are corrected. The risk report now shows the static gap, the dynamic gap and the variance from the last forecast on one page.
Watch out
Common mistakes.
- Treating total assets minus liabilities as the relevant repricing gap.
- Using optimistic future growth to conceal current exposure.
- Assuming matched amounts remove timing, basis and option risks.
Questions
People also ask.
Is it a fixed forecast?
No. It depends on scenarios and behavioural assumptions.
Does a zero gap eliminate all rate risk?
No. Basis, options and timing differences can remain.
Should static analysis be discarded?
No. A static view can help reveal exposure obscured by future assumptions.
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