What it means
Every asset and liability has a date on which it matures, meaning it is repaid, or reprices, meaning its interest rate resets. A bank might hold long-term fixed-rate mortgages on the asset side and short-term deposits on the liability side, so the two sides do not move in step.
To measure the mismatch, the treasury team sorts assets and liabilities into time buckets, such as under three months, three to twelve months and over a year. In each bucket it compares the sensitive assets with the sensitive liabilities, and the difference is the gap for that period.
A positive gap means more assets than liabilities reprice in the period, so rising rates tend to lift income. A negative gap means more liabilities reprice, so rising rates tend to squeeze income because the cost of funding rises before the return on assets does.
The gap also shows liquidity risk. If large liabilities fall due before the assets that fund them are repaid, the firm must find new money, perhaps at a higher cost, and if markets are stressed it may not be able to borrow at all.
Maturity gap analysis is simple and widely used, but it has limits. It ignores the size of rate moves for different instruments, it treats all items in a bucket as maturing at the same moment, and it cannot capture customer behaviour such as early repayments or withdrawals, so banks supplement it with other measures.
Non-financial companies can use the same idea, and the gap approach is a good starting point for any treasurer. A firm with floating-rate loans and fixed-price sales contracts has a gap between how its costs and revenues respond to interest rates.
In practice
Real-world examples.
Example
A savings bank funds 30-year fixed-rate mortgages with deposits that customers can withdraw on demand. The treasurer measures a large negative gap in the short-term buckets and decides to attract longer-term deposits. She offers a higher rate on two-year savings accounts to pull customers towards the longer maturity.
Example
A manufacturer has a $20,000,000 floating-rate loan and sales contracts at fixed prices for the next two years. The finance director enters an interest rate swap to reduce the mismatch between costs and revenues. The swap turns the floating payments into fixed ones, so profit no longer swings with the central bank.
Example
An insurance company buys bonds that mature in 15 years to match the expected timing of long-term claims. The close match leaves a small gap between asset and liability maturities, which means a sudden move in rates has little effect on the company's ability to pay claims.
Formula
Calculation
Maturity gap = Rate-sensitive assets - Rate-sensitive liabilities
Change in net interest income = Gap x Change in interest rates
A bank has $500,000,000 of assets and $650,000,000 of liabilities that reprice within one year. The gap is $500,000,000 - $650,000,000 = -$150,000,000, a negative gap.
If interest rates rise by 1%, the estimated change in net interest income is -$150,000,000 x 0.01 = -$1,500,000, so income would fall by $1,500,000 over the year. If rates fell by 1%, income would rise by $1,500,000, showing how the negative gap makes the bank sensitive to rising rates.Case study
Seen in the real world.
Eastgate Savings is an illustrative, fictional bank whose treasurer reported a one-year gap of -$150,000,000 to the board. The board asked what that meant in dollar terms if rates rose by a full percentage point.
The treasurer explained that net interest income would fall by about $1,500,000 over the year, which was roughly a tenth of the bank's annual profit. She proposed three responses: lengthening the maturity of deposits, buying floating-rate assets and using interest rate swaps to turn some liabilities into fixed-rate ones.
The board approved a combination, reducing the gap to -$50,000,000 over twelve months. A one-point rise in rates would then cost only about $500,000, calculated as -$50,000,000 x 0.01. In this illustrative story the cost of the swaps was modest compared with the earnings protected, and the gap report became a monthly item for the asset and liability committee.
Watch out
Common mistakes.
- Treating a negative gap as always bad, when it benefits the firm if interest rates fall, since funding costs then drop faster than asset yields.
- Using a single gap number for all periods, when the gap differs across time buckets.
- Forgetting that customer behaviour, such as early repayment or deposit withdrawals, can change the true maturity and make the reported gap misleading.
Questions
People also ask.
What is the difference between a maturity gap and a funding gap?
A maturity gap compares when assets and liabilities mature or reprice, while a funding gap compares the amount of lending with the amount of stable funding available.
Who uses maturity gap analysis?
Banks, building societies, insurers and corporate treasurers use it to manage interest rate and liquidity risk.
How can a firm reduce a maturity gap?
It can adjust the terms of assets or liabilities, use interest rate swaps or other derivatives, or change its funding mix, and it should test the result under several rate scenarios.
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