Question

Discuss the steps banks can take to reduce risk in the context of effective GAP management.

Answer 1

The various steps that banks can take so as to reduce risk in the context of effective GAP management are:

1. Determine period GAPs over short time intervals. This will help in managing the sensitivities of assets and liabilities in an optimal manner.

2. Banks should match fund long term assets with non interest-bearing liabilities that is there in their books.

3. Banks should match fund repriceable assets with same types of repricable liabilities. This will enable them to ensure that periodic GAPs approach zero.

4. Banks can use off-balance sheet transactions for hedging purpose. Examples are interest rate swaps and financial futures.