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A bank has a positive repricing gap when more assets than liabilities reset their interest rates within the chosen window. If both sides respond equally to a rate rise, the bank’s net interest income should increase; a negative gap reverses that direction. The gap is an earnings sensitivity estimate, not a complete measure of the bank’s interest rate risk.
Identify what can reprice
Choose a time window first, then place each balance-sheet position according to its next rate reset or maturity. A floating-rate loan may enter an early bucket even if the loan itself matures much later. A fixed-rate loan stays out until its contractual rate can change or its principal can be reinvested. The Bank for International Settlements’ discussion of repricing gaps explains why matching the timing of assets and liabilities can reduce income sensitivity.
The sign tells you which side responds more. A positive gap is asset-sensitive; a negative gap is liability-sensitive. For a simplified parallel rate move, estimate the annual change in net interest income by multiplying the gap by the change in interest rate.
A one-year worked example
Take an illustrative, invented bank with £120 million of assets and £100 million of liabilities that both reprice immediately and remain outstanding for the full year. Assume each rate changes by the same one percentage point after a parallel upward shock, with no change in balances or customer behaviour. The one-year repricing gap is £20 million.
- Additional annual interest income is £1.2 million: £120 million times 0.01.
- Additional annual interest expense is £1.0 million: £100 million times 0.01.
- The illustrative change in one-year net interest income is therefore plus £0.2 million. Equivalently, £20 million times 0.01 gives £0.2 million.
Reverse the shock and the simple estimate becomes minus £0.2 million. If the positions reset partway through the year, the full-year shortcut overstates the income change; timing must then enter the calculation. The figures above are invented solely to show the method, not observed bank data.
What the gap does not settle
A positive gap does not mean that every rate rise helps the bank overall. Asset and liability rates may respond by different amounts, customers may repay or withdraw earlier than expected, and positions outside the selected window still matter. The Basel Committee’s interest rate risk guidance distinguishes earnings measures from changes in economic value. A small income gap can coexist with a material change in the market value of assets and liabilities.
On an exam calculation, write the window and gap sign before applying the shock. The common error is to treat “positive” as an unconditional gain: it predicts higher income only for a rise under the stated equal-response assumptions. The FRM programme page gives the broader study context, while Omni’s methodology explains its approach to practising quantitative ideas.
Sources
- Interest rate risk management by EME banks · bis.org · Retrieved
- Application guidance on interest rate risk in the banking book · bis.org · Retrieved
- FRM® Study Material, Guide, Books, Practice Exams | GARP · garp.org · Retrieved
