Gap analysis model measures the direction and extent of asset-liability mismatch through either funding or maturity gap. It is computed for assets and liabilities of differing maturities and is calculated for a set time horizon. This model looks at the repricing gap that exists between the interest revenue earned on the bank’s assets and the interest paid on its liabilities over a particular period of time* . It highlights the net interest income exposure of the bank to changes in interest rates in different maturity buckets. 6.9 Repricing gaps are calculated for assets and liabilities of differing maturities. A positive gap indicates that assets get repriced before liabilities, whereas a negative gap indicates that liabilities get repriced before assets. The bank looks at the rate sensitivity (the time the bank manager will have to wait in order to change the posted rates on any asset or liability) of each asset and liability on the balance sheet. The general formula that is used is as follows: NIIi = R i (GAPi) While NII is the net interest income, R refers to the interest rates impacting assets and liabilities in the relevant maturity bucket and GAP refers to the differences between the book value of the rate sensitive assets and the rate sensitive liabilities. Thus, when there is a change in the interest rate, one can easily identify the impact of the change on the net interest income of the bank. Interest rate changes have a market value effect. The basic weakness with this model is that this method takes into account only the book value of assets and liabilities and hence ignores their market value. This method, therefore, is only a partial measure of the true interest rate exposure of a bank.
