Question

In Bank management, what are the key steps in static GAP analysis? Explain the purpose of each step and how a bank would use such analysis.

Answer 1

Introduction

Static GAP analysis is used to evaluate the changes in Net interest income based on changes in interest rate environment. It analyses the short term and long term sources of finance with short term and long term assets i.e. compares the composition of the assets and the liabilities. It gives the bank a measure of its interest rate risk on the overall portfolio. However, it has a major drawback that it assumes a specific interest rate environment unlike sensitivity whih assumes a number of diferent scenarios.

Basic steps in GAP analysis

a. Develop a forecast regarding the expected interest rates on the assets and the liabilities. Generally, the expectation is built for short term as well as long term interest rates

b. Identify the timing of the expected repricing based on bucketed intervals.

c. Classify the assets and the liabilities as either floating or fixed i,e, rate sensitive or fixed. Now, compare RSAs and RSLs

d. Forecast the NIM (net interest Income and net interest margin) based on the gaps identified. The purpose is to find the variability on the earnings based on the expecations.