Roll rate analysis and loans

 

roll rate analysis and loans

It's common today to discount the importance of that old dependable asset liability standby, the gap report.  Yet, the gap report still provides an important window on interest rate risk.  Let's review basic gap analysis, and then look at two banks and their gap results.

Gap is the difference between the amount of assets and liabilities on which interest rates are reset during any particular bucket of time.  If a bank has both $5 million in assets and $5 million in liabilities that reprice in any given time window, changes in interest rates should not change the bank's net interest margin.  This is known as a balanced gap position. 

If instead, $10 million in assets reprice with only $5 million in liabilities repricing, the bank is in an asset sensitive position.  An asset sensitive bank will enjoy a net interest margin increase if interest rates increase.  Of course, as we've seen over the past few years, the asset sensitive bank will have net interest margin compression if rates fall. 

Roll rate analysis and loans

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It's common today to discount the importance of that old dependable asset liability standby, the gap report.  Yet, the gap report still provides an important window on interest rate risk.  Let's review basic gap analysis, and then look at two banks and their gap results.

Gap is the difference between the amount of assets and liabilities on which interest rates are reset during any particular bucket of time.  If a bank has both $5 million in assets and $5 million in liabilities that reprice in any given time window, changes in interest rates should not change the bank's net interest margin.  This is known as a balanced gap position. 

If instead, $10 million in assets reprice with only $5 million in liabilities repricing, the bank is in an asset sensitive position.  An asset sensitive bank will enjoy a net interest margin increase if interest rates increase.  Of course, as we've seen over the past few years, the asset sensitive bank will have net interest margin compression if rates fall. 

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