What is a liquidity gap?
The liquidity gap is a measure of the difference between the total liquid assets of the person or the organization compared to the total number of obligations taken over by the person or organization. It is also one way to measure the level of a person's financial risk or organization that is called the risk of liquidity mismatch or liquidity mismatch. A bank or investor group can measure a liquidity or organization gap at one time or two or more and compare a change in a liquidity gap. The organization could even decide to measure its own liquidity to assess its financial health. The equation consists of the amount of the liquid assets of a person or organization, such as bank accounts or investment portfolio, minus any obligations incurred by a person or organization. A negative gap means that a person or organization is a netting less income than the expected amount of liabilities. When the gap is positive, the person or organization has the remaining assets of the liquid asset after fulfilling all obligations.
Banks or other credit institutions use gaps in liquidity to assign interest rates to individuals and organizations. How high the interest rate for the loan depends on how much risk the creditor believes that he is involved in the transaction with the loan. If a person or organization requesting a negative gap and the creditor thinks that the gap in the near future does not improve significantly, the creditor could decide not to lend any money or offer a loan for a significantly higher interest rate.
The liquidity gap of man or organization usually varies over time at different pace, as different factors can affect the amount of gap. When living costs OR management of the company and the income of a person or organization do not increase at the same rate, the gap becomes more negative. If an organization or person takes over a new responsibility, such as the closure of a new loan, the gap becomes more negative.
measuring itDnoty gaps in liquidity for two or more points in time helps a potential creditor or investor to take investment decisions. Based on information from the gap values, a potential creditor or investor may determine in which direction the debtor's finances are directed. The difference in the gap values between two or more points in time is called a marginal gap.