FRM Exam Part II · Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

Repricing Gap and Funding Gap Analysis Explained

Updated 11 October 2026 · Fact-checked

Repricing gap = rate-sensitive assets (RSA) minus rate-sensitive liabilities (RSL) in a time bucket. Estimated change in net interest income = gap × change in rates. A positive gap gains when rates rise; a negative gap loses. Cumulative gap adds buckets up to your chosen horizon.

Understand Repricing Gap and Funding Gap Analysis

A bank earns interest on assets and pays interest on liabilities. Its profit from this is net interest income (NII). When market rates move, NII changes, because some assets and liabilities reprice and others do not.

The repricing gap model (also called the funding gap model) sorts balance sheet items into time buckets by when they next reprice. Floating-rate loans reset at their next reset date. Fixed-rate items reprice at maturity. An item is rate sensitive in a bucket if it reprices or matures within that bucket.

The gap for a bucket is RSA minus RSL. If RSA exceeds RSL, the gap is positive (asset-sensitive). More assets than liabilities reprice, so rising rates lift interest income by more than interest expense. If RSL exceeds RSA, the gap is negative (liability-sensitive), and rising rates cut NII. A zero gap means NII is roughly protected from a parallel rate shift over that bucket.

You can look at one bucket or add them. The cumulative gap is the sum of the gaps from the first bucket up to a horizon, such as one year. The NII effect over that horizon uses the cumulative gap. Items that reprice early in the year earn or pay the new rate for longer, so a refined version weights each bucket by the fraction of the horizon remaining after repricing.

The model is simple and easy to report, but it is a limited view. It looks only at NII (an earnings view), not the economic value of equity. It assumes a parallel shift and ignores basis risk, since the rates on assets and liabilities may not move one-for-one. It ignores embedded options such as prepayments and early withdrawals, treats non-maturity deposits crudely, and ignores the timing of repricing within a bucket, unless you weight for it.

Key formulas to remember

Repricing gap: Gap = RSA − RSL; Measured for a time bucket. Positive means asset-sensitive; negative means liability-sensitive.
Cumulative gap: CGap(T) = Σ (RSA − RSL) over all buckets up to horizon T; Use the cumulative gap for the NII effect over the whole horizon.
Change in NII: ΔNII = Gap × Δr; Applies to a parallel rate shift, with Δr in decimal. Use the cumulative gap for the horizon.
Time-weighted NII effect: ΔNII = Σ Gapᵢ × Δr × (fraction of horizon remaining after bucket i reprices); Use when buckets reprice at different points in the year, for example a mid-point of 6 months gives a weight of 0.5 on a 1-year horizon.
Relative gap: Relative gap = Gap ÷ Total assets; Lets you compare banks of different sizes.
Gap ratio: Gap ratio = RSA ÷ RSL; Above 1 means asset-sensitive; below 1 means liability-sensitive.

How to solve Repricing Gap and Funding Gap Analysis questions

Use this order for any gap question, from calculation to interpretation.

1Identify the horizon and the rate change, including its direction and size in decimal (for example 1% = 0.01).
2List the assets and liabilities that reprice or mature inside the horizon. Floating items reprice at reset, fixed items at maturity.
3Total RSA and total RSL for the bucket, ignoring items that reprice later or not at all.
4Compute Gap = RSA − RSL. Add buckets if the question asks for a cumulative gap.
5Compute ΔNII = Gap × Δr. If the question gives timing within the horizon, weight each bucket by the remaining fraction.
6Interpret the sign: positive gap with rising rates raises NII; negative gap with rising rates lowers it. Reverse for falling rates.
7Check the assumptions: parallel shift, no basis risk, no option effects. Name the one that the question tests.

Quickest way: Sign-and-size shortcut

When to use it: Use when the options differ in sign or size and you need a fast answer.

Work out the gap as RSA − RSL and note its sign.
Match sign and rate direction: same sign means NII rises, opposite signs mean it falls.
Multiply gap by rate change once. That is the answer in the same currency units.
Eliminate options with the wrong sign or a wrong power of ten before any other check.

Common mistakes in Repricing Gap and Funding Gap Analysis

Counting all assets and liabilities as rate sensitive.
The total balance sheet looks like the obvious base.
Fix: Include only items that reprice or mature within the horizon. Leave out later-repricing and non-interest-bearing items.
Getting the sign of the effect backwards.
Students mix up asset-sensitive and liability-sensitive.
Fix: Positive gap plus rising rates means NII rises. Negative gap plus rising rates means NII falls. Reverse both for falling rates.
Using a single bucket gap when the question asks for a one-year effect.
The bucket figures are listed first and look final.
Fix: Add the buckets up to the horizon to get the cumulative gap, then multiply by the rate change.
Treating a zero gap as zero risk.
The formula gives ΔNII = 0.
Fix: A zero gap covers only parallel shifts. Basis risk, non-parallel curve moves, options and the economic value of equity are still exposed.
Using the rate change in percentage points as a whole number.
Skipping the conversion to decimal.
Fix: Convert 1% to 0.01 before multiplying, or divide the final answer by 100.
Applying the gap formula to economic value.
Gap and duration gap are taught together.
Fix: Repricing gap measures the earnings (NII) effect. Duration gap and economic value of equity measure value changes.

Worked examples

Example 1

A bank has, in the one-year horizon, rate-sensitive assets of USD 800 million and rate-sensitive liabilities of USD 950 million. Rates rise by 1% (parallel). Estimate the change in NII and interpret it.

Show the solution

Gap = RSA − RSL = 800 − 950 = −USD 150 million.
The gap is negative, so the bank is liability-sensitive.
Δr = 0.01.
ΔNII = −150 × 0.01 = −USD 1.5 million.
Rates rose and the gap is negative, so NII falls.

Answer: NII falls by about USD 1.5 million. The bank is liability-sensitive.

Example 2

A bank reports these gaps: 0-3 months, +USD 40 million; 3-6 months, −USD 70 million; 6-12 months, +USD 25 million. Rates fall by 0.5%. Find the one-year cumulative gap and the estimated change in NII using the simple formula.

Show the solution

Cumulative gap = 40 − 70 + 25 = −USD 5 million.
Δr = −0.005.
ΔNII = −5 × (−0.005) = +USD 0.025 million.
That is USD 25,000.
Interpretation: a slightly negative gap benefits when rates fall.

Answer: The cumulative one-year gap is −USD 5 million and NII rises by about USD 25,000.

Exam tips

Read whether the question wants a bucket gap or a cumulative gap, and whether the simple or the time-weighted formula applies.
Expect conceptual items on limitations: basis risk, optionality, non-parallel shifts, the earnings-only view and non-maturity deposit assumptions.
Check the sign last. A wrong sign is the easiest way to lose a mark on a question where the arithmetic is right.
Know how repricing gap differs from duration gap: gap targets NII over a horizon, duration gap targets economic value of equity.

Practice questions from Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

Repricing Gap and Funding 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.

CMA FinalMeasuring Interest Rate Risk: Gap Analysis

Repricing Gap and Funding Gap Analysis: frequently asked questions

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

A positive gap means rate-sensitive assets exceed rate-sensitive liabilities, so NII rises when rates rise. A negative gap means rate-sensitive liabilities exceed assets, so NII falls when rates rise. The effects reverse when rates fall.

How do I calculate the cumulative gap?

Compute RSA − RSL for each time bucket, then add the bucket gaps from the first bucket up to your horizon. Use that total with the rate change to estimate the NII effect over the horizon.

What are the main limitations of the repricing gap model?

It looks only at earnings, not economic value. It assumes a parallel shift and ignores basis risk. It also ignores embedded options, such as prepayments, and handles non-maturity deposits and within-bucket timing poorly.

Is the repricing gap the same as the funding gap?

In this context the terms are used for the same model, which compares the amount of assets and liabilities that reprice in a period. Do not confuse it with a liquidity gap, which compares cash inflows and outflows.