Risk Management in Banking and Insurance · Liquidity Risk Management

Measuring Liquidity: Gap Analysis and Ratios in Banks

Updated 11 October 2026 · Fact-checked

Liquidity gap analysis places a bank's expected cash inflows and outflows into time buckets by residual maturity. The gap is inflows minus outflows in each bucket. The bank compares the negative gap with outflows against a tolerance limit, 20% in each of the first four buckets (Day 1 to 28 days), and tracks liquidity ratios alongside.

Understand Measuring Liquidity: Gap Analysis and Ratios

A bank borrows short and lends long. Deposits can be withdrawn soon, but loans come back slowly. So the bank must know, day by day, whether it will have enough cash to meet its payments. Liquidity measurement answers this question.

The main tool is the structural liquidity statement. You take every asset and liability and place its cash flow in a time bucket according to its residual maturity, meaning the time left until the cash is due. Typical buckets run from Day 1, 2-7 days, 8-14 days, 15-28 days, then 29 days to 3 months, and on to over 5 years. Check the exact bucket structure in the RBI guidelines in your study material.

In each bucket, inflows (maturing assets, such as loan repayments and investments) are compared with outflows (maturing liabilities, such as deposits, borrowings, and commitments). The difference is the maturity mismatch or gap. A negative gap means outflows exceed inflows, so the bank must raise funds.

A gap is not bad by itself, because banks always carry some mismatch. What matters is its size. Supervisors set tolerance limits. Under the RBI guidelines, the net negative mismatch in each of the first four buckets (Day 1, 2-7 days, 8-14 days and 15-28 days) should not exceed 20% of cash outflows in that bucket. Cumulative gaps are monitored alongside these limits. Banks may set their own internal tolerance levels for the longer buckets, with board approval.

The structural statement uses contractual maturities and so is static. Dynamic liquidity adds behaviour and future business: expected growth in deposits and loans, renewals, and rollovers. It projects the gap over a short horizon, so it shows the funding need more realistically. Liquidity ratios add a quick balance-sheet view of how liquid and how dependent on volatile funding the bank is.

Key rules to remember

Gap (mismatch) in a bucket: Gap = Inflows − Outflows; Negative gap means a funding shortfall in that bucket.
Cumulative gap: Cumulative gap = running total of gaps from the first bucket up to the bucket considered; Cumulative gaps are monitored alongside the limits on individual buckets.
Mismatch as % of outflows: Mismatch % = (Inflows − Outflows) ÷ Outflows × 100; A negative figure is compared with the limit, for example the 20% limit in each of the first four buckets.
Tolerance limit check: Negative mismatch ÷ Outflows ≤ 20% (in each of Day 1, 2-7, 8-14 and 15-28 days); Applies bucket by bucket to the first four buckets. Apply the limit given in the question; internal limits for longer buckets may differ.
Liquid assets to total assets: Liquid assets ÷ Total assets × 100; Higher means a bigger cushion.
Loan to deposit ratio: Total loans ÷ Total deposits × 100; A high ratio means more reliance on other funds.
Volatile liabilities dependence: (Volatile liabilities − Temporary assets) ÷ (Earning assets − Temporary assets) × 100; Use the definitions given in the question. Lower is safer.

How to solve Measuring Liquidity: Gap Analysis and Ratios questions

Use this method for any gap or ratio question.

1Read the question for the bucket structure, the limit given, and whether the data is contractual or includes behavioural assumptions.
2Place each asset and liability in the correct time bucket by residual maturity, not original maturity.
3Total inflows (assets) and outflows (liabilities and commitments) for each bucket.
4Compute the gap for each bucket as inflows minus outflows, then the cumulative gap.
5Express the negative gap as a percentage of outflows and compare it with the limit. State clearly whether it is breached.
6For ratios, write the formula first, substitute the figures, and give the result to two decimals.
7Conclude with an action: arrange funding, change the maturity profile, or hold more liquid assets. Link it to the contingency plan if needed.

Quickest way: Three-line gap check

When to use it: When the MCQ or case gives bucket totals and asks whether a limit is breached.

Compute Gap = Inflows − Outflows for the bucket.
Divide the negative gap by Outflows and compare with the limit.
If the percentage is larger than the limit, it is breached. Positive gaps never breach a negative-gap limit.

Common mistakes in Measuring Liquidity: Gap Analysis and Ratios

Dividing the gap by inflows or total assets instead of outflows.
Students recall a percentage but not its base.
Fix: For the mismatch limit, always divide the negative gap by outflows of that bucket.
Placing items by original maturity.
The balance sheet shows original terms.
Fix: Use residual maturity, the time remaining from the reporting date.
Treating any negative gap as a breach.
Negative sounds bad.
Fix: Only a negative gap beyond the tolerance limit is a breach.
Confusing the static structural statement with dynamic liquidity.
Both use time buckets.
Fix: Structural uses existing contractual flows. Dynamic adds expected growth, rollovers and behaviour.
Looking at one bucket only and ignoring the cumulative gap.
Each bucket looks fine alone.
Fix: Compute the running total and judge the cumulative position too.

Worked examples

Example 1

In the first time bucket, a bank has cash outflows of ₹500 crore and inflows of ₹420 crore. The tolerance limit is 20% of outflows. Is the limit breached?

Show the solution

Gap = 420 − 500 = −₹80 crore.
Mismatch % = 80 ÷ 500 × 100 = 16%.
Compare: 16% is below the 20% limit.

Answer: The negative gap is ₹80 crore, which is 16% of outflows. The limit is not breached, but the bank should watch the next buckets.

Example 2

A bank reports these figures for two buckets (₹ crore). Day 1: inflows 300, outflows 350. Days 2-7: inflows 200, outflows 280. The limit is that the net negative mismatch in each bucket must not exceed 20% of cash outflows in that bucket. Check each bucket and note the cumulative gap.

Show the solution

Day 1 gap = 300 − 350 = −50.
Day 1 mismatch % = 50 ÷ 350 × 100 = 14.29%, which is below 20%. Within the limit.
Days 2-7 gap = 200 − 280 = −80.
Days 2-7 mismatch % = 80 ÷ 280 × 100 = 28.57%, which is above 20%. Breach.
Cumulative gap after Days 2-7 = −50 − 80 = −130. This is a monitored figure, not the limit test. (Cumulative outflows are 630, so the gap is 20.63% of them, but the limit is applied bucket by bucket.)

Answer: Day 1 is within the limit at 14.29% of outflows. Days 2-7 breaches the limit at 28.57% of outflows, so the bank must arrange funds or reduce outflows in that bucket. The cumulative gap of −₹130 crore is monitored alongside.

Exam tips

Show the gap, the percentage and a one-line conclusion on the limit. Many marks go to the conclusion.
In case-based MCQs, check which base the question uses for the percentage before calculating.
Know the difference between structural and dynamic statements; it is a common short-note question.
For ratio questions, write the formula before the numbers, since the definitions can vary by source.
Link your recommendation to funding sources or a contingency plan for application marks.

Practice questions from Liquidity Risk Management

Measuring Liquidity: Gap Analysis and Ratios in other exams

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

Measuring Liquidity: Gap Analysis and Ratios: frequently asked questions

What is the 20% limit on liquidity mismatches?

It is a tolerance limit on the net negative mismatch in each of the first four buckets (Day 1, 2-7, 8-14 and 15-28 days), set as 20% of cash outflows in that bucket. Cumulative gaps are monitored alongside, and banks may set internal limits for longer buckets. A bank within the limit has an acceptable short-term mismatch.

What is a structural liquidity statement?

It is a statement that places a bank's assets and liabilities in time buckets by residual maturity. It shows the gap between inflows and outflows in each bucket. It is based on contractual maturities.

How is dynamic liquidity different from the structural statement?

The structural statement uses existing contractual flows. Dynamic liquidity projects the gap over a short horizon using expected growth, rollovers and behaviour. It gives a more realistic view of funding needs.

Is a negative gap always a problem?

No. Banks naturally have negative gaps in short buckets. It becomes a concern when it exceeds the tolerance limit or cannot be funded.