What Is a Gap Risk?
The liquidity gap method refers to the use of liquidity gap indicators to measure the bank's liquidity risk.
Liquidity gap method
Right!
- Chinese name
- Liquidity gap method
- Foreign name
- Liquidity gap Act
- Definition
- Liquidity gap indicator to measure liquidity risk
- Defect
- Inability to evaluate banks' borrowing capacity, etc.
- The liquidity gap method refers to the use of liquidity gap indicators to measure the bank's liquidity risk.
- The liquidity gap is the difference between bank assets and liabilities. When the liability is greater than the asset, it means that the bank has excess liquidity; when the liability is less than the asset, it means that the bank has liquidity risk. To maintain the existing asset size, it must seek new funding sources from the outside. As banks' assets and liabilities are constantly changing, the concept of marginal liquidity gap should be introduced. The so-called marginal liquidity gap refers to the difference between the algebraic value of changes in bank assets and the algebraic value of changes in liabilities. When the marginal liquidity gap is positive, it means excess liquidity; when the marginal liquidity gap is negative, it means there is liquidity risk. If the liquidity gap arises from current assets and liabilities, it is called a static liquidity gap; if the liquidity gap arises from new assets and liabilities, it is called a dynamic liquidity gap.
- defect
- Although the liquidity gap method has a rough description of the current situation of bank liquidity, it still has many defects: [1]
- (1) When classifying some assets and liabilities, they often rely on subjective judgment. For example, although demand deposits do not have a nominal maturity date, sometimes they stay in the bank for a long time. Another example is the occurrence of prepayment of assets. Another example is that although the term of equity is theoretically infinite, when the bank continues to increase its equity as needed, it will also affect the liquidity gap;
- (2) The maturity structure of bank assets and liabilities can neither fully reflect the differences in the quality of assets and liabilities, nor include those off-balance sheet businesses that appear in the form of contingent liabilities into a gap analysis;
- (3) It cannot assess the bank's ability to borrow. For some banks, their liquidity is mainly met by raising new funds from the market, and this ability depends directly on the bank's position in the market, not the term structure of its assets and liabilities.