Gaps and Gap Analysis

Negative Gap

By March 17, 2016 December 1st, 2018 No Comments

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Bad News For The Banks?

When investigating a negative gap, it’s important to remember that these spaces in the market are usually most pertinent to the banks, and not to individual investors. However, the banks are inextricably tied to the success of the credit market, and almost every business in the world, so by default, that which negatively affects the banks has a real chance of affecting you negatively as well.

When the economic situation shows that a bank’s interest-sensitive liabilities have exceeded its interest-sensitive assets, analysts will say that a negative gap has occurred. Although this can be disconcerting, it doesn’t always signal a bad trend for the banks. In many cases, this will quickly be followed by a decline in interest rates, which would mean that the bank’s liabilities will be re-priced, and as a result, their income would increase, restoring a relative equilibrium in the market. However, increases in interest rates would have the opposite effect, and might drive the bank’s income negativity down even further. It’s important for you to be able to monitor these movements in the finance market, so that you can be prepared to protect your own assets.