Question

Bank A has risk-sensitive assets of $16 million and rate-sensitive liabilities of $20 million. Bank B has risk sensitive assets of $2 million, and rate-sensitive liabilities of $4 million. Calculate the GAP measure most relevant, and state which bank has the least amount of interest rate risk.

Answer 1

GAP measure is the diffrence of risk sensitive assets and risk sensitive liablities. Higher the Interest rate risk when GAP measure is Lower and Vice versa , Because Higher GAP measure denotes that Bank have more assets in comparison to liablites and when there will any interest rate changes then it will benificial to Bank , similarly when GAP meausre is lower , it denots that Bank have More liablities in comparison to assets which means ,if interest rate change bank will pay more interest and simultenously profit will go down.

For BANK A

GAP = $16million less $ 20 Million

= -$4 million

For Bank B

GAP = $2 million less $4 million

= -$ 2 Miliion

From the above calculation , it is clearly shown that Bank B has higher GAP meausre which means Bank B has least amont of interest rate risk.