Banking Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

The key definition of a bank's GAP is the difference between rate-sensitive assets and liabilities. This concept is crucial for understanding a bank’s exposure to interest rate risk. Rate-sensitive assets are those that have interest rates that can change in response to market conditions, such as loans or certain types of investments that could be refinanced or repriced. Rate-sensitive liabilities, on the other hand, are obligations the bank has to pay interest on deposits or other borrowings that can also fluctuate with market rates.

When a bank calculates its GAP, it assesses whether its rate-sensitive assets exceed its rate-sensitive liabilities or vice versa. A positive GAP indicates that the bank has more rate-sensitive assets than liabilities, which can be beneficial in a rising interest rate environment as it could lead to increased income. Conversely, a negative GAP indicates that liabilities exceed assets, which could pose risks in such environments.

This concept allows bankers to manage interest rate risk and optimize their portfolio strategies effectively. Understanding and managing the GAP is vital for a bank's financial health and interest income stability, making this definition an essential element in banking practice.