What it means
A bank earns money by lending at one rate and funding itself at another, so its profit depends on the gap between the two. Some assets and liabilities reprice quickly, such as variable-rate loans and short deposits.
Others, such as fixed-rate mortgages, stay the same for years. Static gap analysis sorts all of these items into time buckets, for example up to three months, three to twelve months and over a year.
In each bucket the bank subtracts rate-sensitive liabilities from rate-sensitive assets to find the gap. It is called static because it looks at the balance sheet as it stands today and does not assume new business is written.
The result tells management how net interest income, the difference between interest earned and interest paid, will respond to a change in rates. If the one-year gap is positive and rates rise by one percentage point, the extra income on assets will outweigh the extra cost on liabilities.
A negative gap produces the reverse effect. Treasury teams use the gap to decide whether to hedge, reshape the balance sheet or leave things alone.
It is a simple, quick measure that regulators and boards can understand without specialist models. Its limits are that it ignores how customers behave, such as early loan repayments, and it assumes all items reprice by the same amount when rates move.
Because of these weaknesses, banks usually pair static gap with more advanced tools such as duration analysis and simulation of future earnings. A dynamic gap, by contrast, includes forecast changes in the balance sheet.
Static gap is the starting point, not the full picture. Non-bank readers meet the idea in board packs and credit rating reports, where a bank's gap profile is one of the quick indicators of how sensitive its profit is to rate moves.
A company that holds deposits or borrows from that bank can use the same reasoning to ask how the lender's pricing might change. Understanding the gap helps a finance manager anticipate whether loan margins are likely to widen or narrow.
In practice
Real-world examples.
Example
A regional bank's treasurer sees a one-year gap of -$80,000,000 and expects the central bank to raise rates. She shifts some funding from short-term deposits into three-year certificates of deposit to reduce the repricing exposure. The gap narrows to -$30,000,000.
Example
A credit union board reviews its quarterly risk report and finds a positive gap of $25,000,000. Management is comfortable because the board expects rates to rise, which would lift earnings. They agree to review again if rate forecasts change.
Example
An auditor at a building society tests whether the gap report reflects actual contract terms. She finds that a block of variable-rate mortgages was placed in the wrong repricing bucket, which overstated the positive gap by $12,000,000. The report is corrected before it reaches the board.
Formula
Calculation
Static gap = rate-sensitive assets - rate-sensitive liabilities
Change in net interest income = gap x change in interest rate
Suppose a bank has $400,000,000 of assets and $550,000,000 of liabilities that reprice within one year. Its one-year gap is 400,000,000 - 550,000,000 = -$150,000,000, a negative gap. If rates rise by 1%, net interest income changes by -150,000,000 x 0.01 = -$1,500,000, so the bank would lose $1,500,000 over the year.Case study
Seen in the real world.
Riverton Savings is an illustrative, fictional bank that made a large number of fixed-rate loans funded by short-term deposits. Its static gap report showed -$200,000,000 in the one-year bucket, though the bank was reporting healthy profits at the time.
When the finance team ran a one percentage point rate rise, net interest income fell by $2,000,000 on paper. After the central bank raised rates by two points over the following year, the bank's income did decline, though by less than the report suggested because some deposits repriced slowly.
The illustrative takeaway is that static gap pointed in the right direction, but the size of the move depended on customer behaviour that the simple report could not capture.
Watch out
Common mistakes.
- Assuming a positive gap is always good, when it only helps if rates rise and hurts if they fall.
- Treating the gap number as an exact forecast, when it ignores customer behaviour such as early repayments and deposit switching.
- Mixing up static and dynamic analysis, when static gap uses today's balance sheet only and does not include expected new business.
Questions
People also ask.
Why is it called static?
Because it takes a snapshot of existing assets and liabilities and does not model changes in the balance sheet over time.
What is a good gap figure?
There is no universal answer, because it depends on the bank's risk limits, rate outlook and size, which is why boards set their own limits.
Do non-bank companies use gap analysis?
Occasionally, such as finance arms and leasing firms, but it is mainly a banking tool.
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