What is a negative gap?

A negative gap is a situation where there is a difference between assets susceptible to the interest owned by a financial institution and sensitive to the interest that institutions currently carry. This type of situation is not unusual for many institutions, and if this gap or disparity is maintained to a certain extent, it does not pose any real threat to this institution. Many factors may cause the gap to be significantly expanded, and changes in average interest rates are one of the most important.

The degree of interest risk that the bank or other institution carries with its assets and obligations will affect the level of the negative gap that exists. If the average interest rate is more or less in accordance with the rates associated with these obligations and assets, the gap is likely to remain in an acceptable extent. Sudden changes in this average rate may be beneficial for an institution or create a large amount of financial problems, depending on the direction at which the interest rate is.

When the average interest rate changes significantly, it creates a wider disparity that can lead to a positive or negative gap. For example, if an interest rate shift leads to a situation where the value of the interest assets of the institution is higher than the currently susceptible obligations, it is considered a positive gap. If this change in interest rate leads to a situation where interest -sensitive obligations are at a time much larger than assets, the gap is considered negative. Financial institutions routinely monitor the movement of the average interest rate and even predict the future direction of this movement as a way to re -organize assets and obligations in a way that is expected to bring the strongest advantage for the institution.

Usually, the average interest rate is likely to help narrow the negative gap, or even be sufficient to create a positive gap. This is because the drop in interest rate would know againMenal that the interest -sensitive obligations held by the bank would be redesigned to be in accordance with these lower rates. The final result is that the institution is able to pay lower interest on these obligations and maintain more of its income as income. If the average rate increased, it would mean that the same obligations would be rewritten at a higher rate, which would be more burden for the institution and increase the amount of negative gap.