GAP Reports (ALM)

Gap reports are commonly used to assess and manage interest rate risk exposure-specifically, a banks repricing and maturity imbalances. However, a basic gap report can be unreliable indicator of a bank’s overall interest rate risk exposure. Although a simple gap report does not quantify basis risk, yield curve risk, and option risk, bankers have modified […]

As a general rule all assets, liabilities and off-balance-sheet items should be included in a banks gap report. Less complex banks should at a minimum include all earning assets and interest-paying liabilities in their gap reports. A bank also should consider including potential repricing or maturities of all non-earning assets and non-interest bearing liabilities in […]

Many consumer products have embedded options in them because the customer has the right to change the terms of a contract or to act when warranted by market conditions. When a customer exercises the option, the bank loses a valuable asset that will no longer pay interest. Since these products are germane to a bank’s […]

Measuring Risk to Net Interest Income After a bank has stratified the bank’s assets, liabilities, and off- balance sheet instruments into time bands and determined how it will treat embedded options, it must measure net interest income (NII) at risk. The formula to translate gaps into the amount of net interest at risk, measuring exposure […]