The difference between interest rate-sensitive assets and interest rate-sensitive liabilities is defined as interest rate sensitivity gap, which is expressed by gap. Namely: interest rate sensitivity gap = interest rate sensitive assets-interest rate sensitive liabilities.
The interest rate risk caused by the unequal change of interest rate sensitive assets and interest rate sensitive liabilities mainly comes from the mismatch of the term structure of assets and liabilities of commercial banks.
When the interest-sensitive assets are greater than the interest-sensitive liabilities, that is, the bank's operation is in a "positive gap" state, with the increase of interest rates, the bank's income increases, and with the decrease of interest rates, the bank's income decreases.
Extended data
Relationship between Interest Rate Sensitivity Gap and Interest Rate Risk in Commercial Banks
Interest rate sensitivity gap mainly analyzes the influence of interest rate fluctuation on the net interest income of banks.
1. Assume that the interest-sensitive assets and liabilities of the bank face the same interest rate fluctuation. When the interest rate fluctuates, the factor that determines the increase or decrease of the net interest income is the difference between the sensitive assets and the sensitive liabilities, that is, the size of the sensitivity gap.
The concept of effective duration is based on the fact that the value of assets or liabilities is the sum of discounted cash flows that can be obtained or paid in the future, and it is defined as the elasticity of the percentage change of the market value of assets or liabilities relative to the market interest rate.
Duration analysis includes the influence of future cash flow and repayment period on the interest rate elasticity of price. Duration is negatively related to the size of future cash flow, and positively related to the length of repayment period, lacking sensitivity gap analysis.
The effective duration can analyze the interest rate risk of each asset or liability and the overall interest rate risk of the bank. The change of market value of bank's net assets is negatively related to the duration gap. The greater the duration gap, the greater the change in the bank's net asset value.
2. In order to avoid interest rate risk, commercial banks choose active or passive operation strategies according to their own risk preferences.
Active strategy means that commercial banks anticipate the changing trend of market interest rates and adjust the interest rate sensitivity gap in advance in order to obtain unexpected benefits from interest rate changes.
For example, in the expectation of rising interest rates, commercial banks adjust the interest rate sensitivity gap to a positive value by increasing sensitive assets or reducing sensitive liabilities.
Passive management strategy means that commercial banks keep the interest rate sensitivity gap at zero level, and no matter how the interest rate changes, it will not affect the bank's net interest margin income. This is a prudent and conservative risk management strategy, but it also loses the market opportunity to obtain excess profits.
References:
Baidu Encyclopedia-Interest Rate Sensitivity Gap