Question

Define maturity GAP. If interest rates are expected to rise in the future, how should bank
management adjust the GAP between its assets and liabilities?

Answer 1

Maturity gap is the measurement of the interest rate risk when a bank has interest rate sensitive assets ams and liabilities. As the interest rate changes, the income from the assets or the liabilities will vary. Hence, maturity gap inclides the calculation of the changes that will occur in the values of the interest rate sensitive assets and liabilities with change in interest rate.

If interest rate are expected to increase in future then liabilities would be priced at a higher interest rate. This will reduce the income. So the gap between assets and liabilities will increase. It should be monitored from time to time. Otherwise the bank will have to opt for money at call in order to bridge the gap