---
type: "Learn"
title: "Negative Gap Interest Rate Risk Simplified Guide"
locale: "zh-CN"
url: "https://longbridge.com/zh-CN/learn/negative-gap-100082.md"
parent: "https://longbridge.com/zh-CN/learn.md"
datetime: "2026-04-01T18:46:47.335Z"
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---

# Negative Gap Interest Rate Risk Simplified Guide

<p>A negative gap is a situation where a financial institution's interest-sensitive liabilities exceed its interest-sensitive assets. A negative gap is not necessarily a bad thing, because if interest rates decline, the entity's liabilities are repriced at lower interest rates. In this scenario, income would increase. However, if interest rates increase, liabilities would be repriced at higher interest rates, and income would decrease.</p><p>The opposite of a negative gap is a positive gap, where an entity's interest-sensitive assets exceed its interest-sensitive liabilities. The terms of negative and positive gaps, which analyze interest rate gaps, are also known as duration gap.</p>

## Core Description

A negative gap occurs when a bank’s interest rate-sensitive liabilities that reprice or mature within a specific period exceed its comparable rate-sensitive assets. This liability-sensitive position indicates that the bank’s net interest margin is susceptible to rising rates, but may expand when rates decrease. Managing a negative gap involves measurement, risk control, scenario analysis, and prudent strategies to align with the institution’s risk appetite and prevailing market conditions.

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## Definition and Background

The concept of the “negative gap” is fundamental in banking and asset-liability management (ALM). A negative gap emerges when the value of interest-sensitive liabilities (ISL) scheduled to reprice or mature within a chosen time horizon is greater than the value of interest-sensitive assets (ISA) during the same period. This leads to a liability-sensitive balance sheet.

### Origins and Evolution

Banks have historically measured gaps by matching the timing of deposit and loan repricing, often in line with business cycles such as harvests or dividend payments. The term “negative gap” became widely recognized in the 1970s when increased interest rate volatility highlighted banks whose funding costs adjusted upward more quickly than the yields on their loans and securities. Regulatory developments and advances in ALM introduced more systematic gap measurement methods, including behavioral modeling (to account for prepayments and deposit stickiness), the use of derivatives for hedging, and regulatory standards such as Basel’s IRRBB (Interest Rate Risk in the Banking Book).

### Modern Practice

Currently, managing a negative gap requires a dynamic approach. Financial institutions actively monitor and adjust their negative and positive gaps, aiming to maintain earnings stability and respond to anticipated market movements. Technological advancements now enable real-time monitoring, scenario analysis, and stress testing, supporting compliance with regulatory requirements and mitigating the risks experienced in previous periods of market stress.

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## Calculation Methods and Applications

Effective management of a negative gap depends on accurate calculations and rigorous implementation. The following outlines typical institutional approaches:

### Identifying Interest-Sensitive Assets and Liabilities

-   **Interest-Sensitive Assets (ISA):** These may include floating-rate loans, adjustable-rate securities, and fixed-rate instruments due to mature or reset soon.
-   **Interest-Sensitive Liabilities (ISL):** These commonly consist of time deposits, wholesale borrowings, floating-rate debt, and the rate-sensitive portion of non-maturity deposits (often determined through beta modeling).

### Repricing Time Buckets

Institutions divide assets and liabilities into time buckets according to the intervals at which their rates reprice, generally ranging from 0–1 months, 1–3 months, up to more than 5 years. This level of detail allows for precise exposure analysis across various time horizons.

### Core Gap Formula

**GAPₜ = ISAₜ – ISLₜ** (for time bucket t)  
A negative value indicates the bank is liability-sensitive during that period.

#### Example Calculation (Hypothetical Case)

Suppose a regional bank has the following in the 0–3 month bucket:

-   ISAs: USD 200,000,000
-   ISLs: USD 260,000,000
-   GAP: USD 200,000,000 – USD 260,000,000 = –USD 60,000,000

If interest rates increase by 100 basis points, the bank’s net interest income (NII) would be projected to decline by approximately USD 600,000 on an annualized basis for that bucket.

### Cumulative Gap and Gap Ratios

-   **Cumulative Gap:** The sum of gaps across all time buckets up to a certain period, measuring total exposure.
-   **Gap Ratio:** ISAₜ / ISLₜ. Values below 1 indicate a negative gap.

### Applications

Measuring the negative gap allows institutions to:

-   Forecast net interest margin (NIM) under varying rate scenarios.
-   Support capital planning and earnings-at-risk (EaR) analysis.
-   Establish risk limits, comply with regulatory expectations (IRRBB), and inform board-level oversight.

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## Comparison, Advantages, and Common Misconceptions

### Comparison with Related Concepts

Concept

Focus

Definition / Purpose

Negative Gap

Repricing timing

Liabilities reprice before assets; earnings are more sensitive to rising rates, and may benefit if rates decline.

Positive Gap

Repricing timing

Assets reprice before liabilities; earnings are more likely to increase if rates rise.

Duration Gap

PV Sensitivity

Measures net present value risk of assets versus liabilities based on all cash flows and interest rate movements.

Repricing Gap

Scheduling

Difference between rate-sensitive assets and liabilities in each repricing time bucket.

Liquidity Gap

Funding structure

Measures mismatch between scheduled inflows and outflows, separate from interest rate movements.

Gap Ratio

Relative exposure

Ratio of rate-sensitive assets to liabilities; a ratio below 1 signals a negative gap.

Net Interest Margin (NIM)

Outcome metric

Reflects actual profitability and realized spreads, not just sensitivity to interest rate changes.

Earnings-at-Risk (EaR)

Stress-testing

Estimates potential short-term earnings decline under hypothetical rate shocks, based on the current gap profile.

### Advantages of a Negative Gap

-   **Benefit in Decreasing Interest Rate Cycles:** Funding costs may decrease more quickly than asset yields, potentially widening the net interest margin during periods of falling rates.
-   **Pricing Flexibility:** Management can adjust deposit pricing more rapidly or selectively price new loans, depending on market conditions.
-   **Reduced Need for Hedging Instruments:** A negative gap may mitigate the requirement to use derivatives to hedge risks associated with long-term fixed-rate assets.

### Disadvantages and Considerations

-   **Exposure to Rate Increases:** If rates rise, funding costs could increase before asset yields adjust, which may compress margins and earnings.
-   **Funding Pressures:** Heightened rate sensitivity can lead to customer attrition or necessitate the use of higher-cost funding sources.
-   **Measurement and Model Risk:** Inaccurate assumptions regarding behavioral responses or excluding derivatives and embedded options can understate real risk exposure.

### Common Misconceptions

-   A negative gap is always unfavorable — in reality, it is a strategic position that may be appropriate under certain interest rate scenarios.
-   The gap equates to net interest margin (NIM) — the repricing gap measures sensitivity, not actual earnings.
-   Repricing gap and duration gap are similar — they address distinct aspects of risk exposure.
-   Only parallel rate shifts are relevant — various rate movement patterns, including curve twists, require consideration.
-   Behavioral and embedded options can be excluded — modeling of prepayments and deposit features is essential for accurate measurement.

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## Practical Guide

Effectively managing a negative gap requires both analysis and strategy. Below is a step-by-step guide:

### Defining and Sizing the Gap

-   **Map Repricing:** Use the actual reset dates rather than contractual maturities to group assets and liabilities correctly.
-   **Select Appropriately Detailed Time Buckets:** Adjust these to align with the institution’s business activities; increased segmentation enhances risk insight but may increase data requirements.

### Policy and Limit Setting

-   Establish board-approved limits for individual period gaps and cumulative gaps by time horizon.
-   Ensure governance procedures are in place so that breaches or significant changes trigger timely review or risk mitigation actions.

### Interest Rate Hedging Options

-   Employ instruments such as interest rate swaps, swaptions, and floors to reduce negative gap exposure.
-   Match the tenors and notional amounts of hedges to the relevant repricing time buckets.

### Scenario Analysis and Stress Testing

-   Model both parallel and non-parallel shifts in interest rates.
-   Incorporate factors such as deposit beta volatility, loan prepayment rates, and potential liquidity constraints.

### Funding and Asset Management

-   Consider extending the maturity of asset portfolios or introducing short-fixed coupon instruments to alter repricing schedules.
-   Diversify funding channels, adjust the mix of maturities, and optimize deposit pricing strategies.

#### Case Study: Hypothetical U.S. Bank

In a hypothetical scenario, a regional bank holds a moderate negative one-year gap. Following a period of policy rate reductions, the bank’s non-maturity deposit costs and short-term borrowing rates decrease promptly, while many fixed-rate consumer and commercial loans adjust more slowly. This leads to a wider NIM and higher near-term net interest income. Conversely, if policy rates rise swiftly, as in another period, liability costs may outpace asset yield increases, compressing margin. This emphasizes both the risks and opportunities of negative gap positioning. (This scenario is illustrative and provided for educational purposes only.)

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## Resources for Learning and Improvement

For further study on negative gap management and related ALM topics, consider the following resources:

-   **Core Textbooks:**  
    “Financial Institutions Management” by Saunders & Cornett (ALM chapters); “Fixed Income Securities” by Tuckman & Serrat; “Handbook of Fixed Income Securities” by Fabozzi.
-   **Regulatory Guides:**  
    Basel Committee IRRBB standards (BCBS 368, 496), BIS Sound Practices, U.S. OCC Interest Rate Risk booklet, Federal Reserve SR Letters.
-   **Academic Journals:**  
    Journal of Banking & Finance, Journal of Financial Intermediation, Review of Financial Studies. Relevant search terms include “duration gap,” “Earnings at Risk,” and “deposit betas.”
-   **Certifications:**  
    CFA Program (Fixed Income, ALM), GARP FRM, PRMIA’s risk management certifications focusing on ALCO and IRRBB practices.
-   **Industry White Papers:**  
    Publications by central banks, leading consultancies (Deloitte, EY, PwC), and vendors such as Moody’s Analytics and Risk.net on ALM best practices.
-   **Online Courses:**  
    “Financial Engineering and Risk Management” (Columbia University on Coursera), NYIF fixed income courses, edX and University of Illinois Treasury/ALM modules.
-   **Data Sources and Tools:**  
    FRED for U.S. yield curves and deposit rates, Bloomberg and Refinitiv for market data, Python libraries (QuantLib, pandas) for modeling ALM.
-   **Case Study Reviews:**  
    Reviews of the U.S. Savings & Loan crisis, the 2023 Silicon Valley Bank case (Federal Reserve and FDIC reports), and the 2022 UK LDI stress event (Bank of England).

Note: When using external data or research, always cite the original source.

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## Frequently Asked Questions

### What is a negative gap?

A negative gap means that, for a specific repricing period, interest-sensitive liabilities exceed comparable assets. This makes the institution’s earnings more sensitive to increases in interest rates.

### How is a negative gap calculated?

Subtract interest-sensitive liabilities (ISL) from interest-sensitive assets (ISA) for each time bucket. A negative result indicates liability sensitivity in that period.

### Why can a negative gap benefit earnings when rates decrease?

When funding costs decline before asset yields, overall interest expenses are reduced, which can expand the net interest margin.

### What are the risks of a negative gap when rates rise?

Liability costs may increase before asset yields adjust, compressing earnings and margins, with potential for customer outflows or higher-cost financing.

### How does a negative gap differ from a duration gap?

A negative gap measures short-term repricing mismatch, while duration gap considers the present value sensitivity of assets and liabilities to interest rate changes.

### How can institutions manage negative gap risks?

Strategies include increasing rate-sensitive assets, lengthening the maturity of funding, employing derivatives, modifying deposit pricing, and adjusting business mix.

### Can non-bank institutions have negative gaps?

Yes. Insurance companies, credit unions, fintech lenders, and corporates with variable-rate funding also encounter, and must manage, negative gaps.

### How should negative gap analysis be validated?

Back-test gap estimates against actual net interest margin, earnings-at-risk metrics, and capital outcomes during various rate cycles.

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## Conclusion

A negative gap is a central concept in asset-liability management, representing the exposure of a bank or institution to changes in interest rates when interest-sensitive liabilities exceed assets in repricing. This positioning may be beneficial if rates decrease, but will pose risks if rates increase. Managing the negative gap involves accurate measurement, sound governance, scenario-driven policies, and dynamic hedging. By understanding repricing mechanics, utilizing advanced modeling, drawing on lessons from past periods, and embedding controls in risk management frameworks, financial entities can align their ALM strategy with their broader objectives, risk tolerance, and regulatory duties.


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