What Is a Financing Gap?

The funding gap is represented by the difference between interest rate sensitive assets and interest rate sensitive liabilities. Obviously, the financing gap has three states: zero gap, positive gap, and negative gap.

Financing gap

The funding gap is represented by the difference between interest rate sensitive assets and interest rate sensitive liabilities. Obviously, the financing gap has three states: zero gap, positive gap, and negative gap.

Chinese name

Financing gap

Foreign name

funding gap)

Three states

Zero gap, positive gap, negative gap

Express

difference

Financing gap

Funding gap (FG) is expressed by the difference between interest-sensitive assets and interest-sensitive liabilities:

FG = RSA RSL

Obviously, there are three types of financing gaps: zero gap, positive gap and negative gap.

Sensitivity ratio

Sensitive ratio (SR) is another expression of financing gap. It is the ratio relationship between interest rate sensitive assets and interest rate sensitive liabilities.

RA = RSA / RSL

There are three basic matching relations between sensitivity ratio and financing gap. When the financing gap is zero, the sensitivity ratio value is 1. When the financing gap is positive, the sensitivity ratio value is greater than 1. When the financing gap is negative, the sensitivity ratio is sensitive. Sex ratio value is less than 1.

Risks to banks from sensitive funding gaps (or financing gaps)

When the bank's fund allocation is at zero gap, the interest rate sensitive assets are equal to the interest rate sensitive liabilities, and the interest rate risk is in an "immunity" state; when it is in a positive gap, the interest rate sensitive assets are greater than the interest rate sensitive liabilities and are in this part of the interest rate exposure The capital makes the bank profit when the interest rate rises, and the interest is damaged when the interest rate falls; when it is in a negative gap, the interest rate sensitive assets are less than the interest rate sensitive liabilities, and the interest rate risk exposure part makes the bank's interests damaged when the interest rate rises, and the interest rate decreases Make money.

If it is difficult for banks to accurately predict the trend of interest rates, adopting a zero-gap allocation strategy appears more secure and secure. Because in the state where interest rate sensitive assets and interest rate sensitive liabilities are balanced, regardless of whether interest rates rise or fall, the pricing of floating rate assets and floating rate liabilities is in the same direction and based on the same amount. This strategy is suitable for those small and medium-sized banks, but some banks, especially some large banks, have strong technical strength and expert teams, are capable of making more accurate predictions of interest rate fluctuations, and are capable of assessing assets and liabilities. The portfolio is adjusted according to willingness, and this zero-gap funding allocation strategy appears to be too rigid and conservative.

Assume that the bank has the ability to predict the trend of market interest rate fluctuations, and the forecast is more accurate. Bank asset and liability managers can fully take advantage of interest rate-sensitive fund allocation and combination technology, and use different gap strategies at different stages to obtain higher returns. rate. The application of this model can be represented by the following figure. In the upper part of the figure, the vertical axis represents the sensitivity ratio of bank funds allocation, the horizontal axis represents time, and the curve represents the allocation status of interest rate sensitive funds.

When predicting a rise in market interest rates, banks should take the initiative to create a positive gap in the allocation of funds so that interest rate sensitive assets are greater than interest rate sensitive liabilities, that is, the sensitivity ratio is greater than 1, so that more assets are repriced in accordance with rising market interest rates. Expand the net interest margin ratio. Theoretically, when the interest rate rises to the peak, the positive gap in bank financing should be the largest, or the sensitivity ratio value should be the highest. However, because it is difficult to predict the peak of interest rates accurately, and once the market interest rate drops from the peak, the rate of decline will be very fast, and it is very likely that banks will not have the time to reverse. Therefore, when the interest rate is in the peak area, the bank should change to the reverse operation to gradually reduce the sensitivity ratio to 1, or return to the state of zero gap as much as possible. When the interest rate starts to fall, banks should actively create a negative gap in capital allocation, so that floating rate liabilities are greater than floating rate assets, that is, the sensitivity ratio is less than 1, so that more liabilities can be repriced according to the declining market interest rate, reducing costs , To expand the net interest margin ratio.

It must be emphasized that it is not easy for banks to expect to make money by constantly changing the interest rate sensitive funding gap (or financing gap). However, when encountering difficulties, human beings will always find a solution to the difficulties, as is the banking industry. First, interest rate forecasts are often not accurate, especially short-term interest rates are more difficult to predict. Once the actual interest rate trend reverses the forecast, the bank may incur significant losses. After a series of setbacks, some foreign commercial banks have switched to using long-term intervals to improve the accuracy of interest rate forecasts, that is, to make long-term interest rate forecasts as far as possible, and to link the rise and fall of interest rates to the economic cycle; and, Even if banks accurately predict changes in interest rates, banks have limited flexibility in controlling and adjusting interest rate-sensitive funding gaps. Because when most of the bank's customers predict the trend of interest rates in line with the bank, their choice of financial products is exactly the opposite of what the bank wants to provide. For example, when both parties predict that interest rates will rise, banks want to increase floating-rate loans to make profits, but customers will require fixed-rate loans to lock in costs, leaving little room for banks to adjust the allocation of funds in their existing customer base. However, with the continuous expansion of financial derivatives and transactions, banks can resolve this contradiction in the financial market through futures trading, forward interest rate agreements and interest rate swaps.