Risk Management in Banking and Insurance · Interest Rate Risk Management

Measuring Interest Rate Risk: Gap Analysis Explained

Updated 11 October 2026 · Fact-checked

Gap analysis measures how exposed a bank's earnings are to interest rate changes. Repricing gap = Rate Sensitive Assets (RSA) − Rate Sensitive Liabilities (RSL) in a time bucket. Change in net interest income ≈ Gap × change in rate. Duration gap extends this to the market value of equity.

Understand Measuring Interest Rate Risk: Gap Analysis

Every bank earns interest on assets and pays interest on liabilities. The difference is net interest income (NII). When market rates move, assets and liabilities do not reprice at the same time. That mismatch is interest rate risk, and gap analysis measures it.

An item is rate sensitive if its interest rate will reset, or it will mature and be replaced, within a chosen time bucket (for example 0-3 months). Floating-rate loans, maturing deposits and short-term borrowings are rate sensitive. Equity and fixed-rate items beyond the bucket are not.

The repricing gap for a bucket is RSA − RSL. A positive gap means more assets than liabilities reprice. If rates rise, interest income rises by more than interest cost, so NII rises. If rates fall, NII falls. A negative gap is the reverse: NII falls when rates rise and rises when rates fall. A zero gap means NII is largely protected from a parallel rate shift in that bucket.

Gap is often shown as a ratio, RSA ÷ RSL, or as gap ÷ total assets. A ratio above 1 means a positive gap. Banks set limits on gaps in each bucket and add them up as a cumulative gap.

Repricing gap looks at earnings only. Duration gap analysis looks at economic value. It compares the duration of assets with the duration of liabilities, adjusted for leverage. It shows how the market value of equity changes when rates move. Gap analysis is simple, but it assumes a parallel shift in rates and ignores timing within a bucket and the optionality in products.

Key rules to remember

Repricing gap: Gap = RSA − RSL; Calculate for each time bucket. Positive gap = asset sensitive; negative gap = liability sensitive.
Change in NII: ΔNII = Gap × Δi; Δi is the change in rate as a decimal. Valid for the bucket's horizon when the rate change applies to the whole period. If the rate change applies only for part of the year, multiply by that fraction.
Cumulative gap: Cumulative gap = sum of gaps of all buckets up to the chosen horizon; Use the cumulative gap for a one-year horizon NII impact.
Gap ratio: Gap ratio = RSA ÷ RSL; Above 1 means positive gap, below 1 means negative gap.
Duration gap: DGAP = DA − (L ÷ A) × DL; DA and DL are durations of assets and liabilities; L and A are market values of liabilities and assets.
Change in equity value: ΔE ≈ −DGAP × A × Δi ÷ (1 + i); Positive DGAP means equity value falls when rates rise. i is the current yield level.

How to solve Measuring Interest Rate Risk: Gap Analysis questions

Use this order for any gap question. It keeps the working clean and the conclusion clear.

1List all assets and liabilities and mark each one as rate sensitive or not within the given bucket or horizon.
2Add up RSA and RSL separately. Leave out equity, fixed assets and fixed-rate items beyond the horizon.
3Compute Gap = RSA − RSL and, if asked, the gap ratio.
4State whether the gap is positive or negative and what it means for NII.
5Apply ΔNII = Gap × Δi, with the sign of the rate change. Adjust for the fraction of the year if the question says so.
6If duration is given, compute DGAP and ΔE using the duration formulas.
7Write a conclusion: the impact on NII or equity and a suggested action, such as shortening asset repricing or lengthening liabilities.

Quickest way: Three-line gap shortcut

When to use it: Use it for MCQs and for the first part of case-based questions where only the direction or size of the NII change is needed.

Compute RSA − RSL in one line. Ignore everything not repricing in the horizon.
Match the sign of the gap with the direction of the rate move: same sign gives higher NII, opposite signs give lower NII.
Multiply gap by the rate change to get the amount. Check the unit, such as ₹ crore.

Common mistakes in Measuring Interest Rate Risk: Gap Analysis

Including all assets and liabilities in RSA and RSL.
Students add the full balance sheet without checking repricing dates.
Fix: Include only items that reprice or mature within the stated bucket. Exclude equity, fixed assets and longer fixed-rate items.
Reversing the NII effect of a negative gap.
Students remember positive gap equals gain and forget the sign flips with a rate fall.
Fix: Always compute Gap × Δi with the sign of Δi. A negative gap with a negative Δi gives a positive result.
Writing Gap = RSL − RSA.
Confusion between liabilities-first and assets-first conventions.
Fix: Use RSA − RSL, and state this formula at the start so the sign interpretation is clear.
Treating the gap result as the change in profit.
Gap analysis affects NII only, not other income, costs or provisions.
Fix: Say that the figure is the estimated change in NII, assuming other items remain unchanged.
Using the percentage as a whole number, such as 2 instead of 0.02.
Rushing under time pressure.
Fix: Convert the rate change to a decimal before multiplying.
Confusing repricing gap with duration gap.
Both are called gap analysis.
Fix: Remember: repricing gap measures earnings (NII); duration gap measures economic value of equity.

Worked examples

Example 1

A bank has, in the 0-1 year bucket, rate sensitive assets of ₹900 crore and rate sensitive liabilities of ₹1,200 crore. Market rates rise by 1% (100 basis points) across the board at the start of the year. Calculate the gap and the effect on NII. What if rates fall by 0.5%?

Show the solution

Gap = RSA − RSL = 900 − 1,200 = −₹300 crore. The gap is negative.
Rate rise: ΔNII = −300 × 0.01 = −₹3 crore.
Rate fall: ΔNII = −300 × (−0.005) = +₹1.5 crore.

Answer: The gap is −₹300 crore (negative). A 1% rise reduces NII by ₹3 crore; a 0.5% fall increases NII by ₹1.5 crore.

Example 2

A bank has total assets of ₹10,000 crore and liabilities of ₹9,000 crore. The duration of assets is 4 years and the duration of liabilities is 2 years. Current yield level is 10%. Calculate the duration gap and the approximate change in the market value of equity if rates rise by 1% (0.01).

Show the solution

DGAP = DA − (L ÷ A) × DL = 4 − (9,000 ÷ 10,000) × 2.
(9,000 ÷ 10,000) × 2 = 0.9 × 2 = 1.8, so DGAP = 4 − 1.8 = 2.2 years.
ΔE ≈ −DGAP × A × Δi ÷ (1 + i) = −2.2 × 10,000 × 0.01 ÷ 1.10.
−2.2 × 10,000 × 0.01 = −220, and −220 ÷ 1.10 = −₹200 crore.

Answer: The duration gap is 2.2 years (positive). A 1% rise in rates reduces the market value of equity by about ₹200 crore.

Exam tips

Start every numerical answer by writing Gap = RSA − RSL, then classify each item. Marks are given for correct classification.
State the sign of the gap and its meaning in words. Examiners look for the positive-versus-negative interpretation.
In case-based MCQs, read the bucket and time horizon carefully. A rate change that applies for part of the year needs a fraction.
Close descriptive answers with a recommendation, such as matching repricing dates or using swaps, and mention that gap analysis assumes a parallel rate shift.
Do not mix repricing gap and duration gap in one calculation. Say clearly which one the question asks for.

Practice questions from Interest Rate Risk Management

Measuring Interest Rate Risk: Gap Analysis in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Measuring Interest Rate Risk: Gap Analysis: frequently asked questions

What is the difference between a positive gap and a negative gap?

A positive gap means RSA exceed RSL in the bucket, so NII rises when rates rise and falls when rates fall. A negative gap means RSL exceed RSA, so NII falls when rates rise and rises when rates fall.

How do I calculate the repricing gap using RSA and RSL?

Add the assets and liabilities that reprice or mature in the bucket, then subtract: Gap = RSA − RSL. Multiply by the rate change to estimate the change in NII.

What is the limitation of gap analysis?

It looks only at earnings and usually assumes a parallel shift in rates. It ignores timing within a bucket, basis risk and customer options such as early repayment or withdrawal.

How is duration gap different from repricing gap?

Repricing gap shows the effect on net interest income over a period. Duration gap shows the effect on the market value of equity, using the durations of assets and liabilities.