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FRM Part I · FRM Exam Part I · Banks

A bank has $200 million of liabilities repricing within one year and $150 million of assets repricing within one year. Ignoring other items, what is the one-year repricing gap, and what is the approximate change in net interest income if all interest rates rise by 1%?

The gap is rate-sensitive assets of $150m minus rate-sensitive liabilities of $200m, or -$50m. The bank is liability-sensitive, so a 1% rise in rates reduces net interest income by about $50m times 1%, which is $0.5 million.

  1. AGap of -$50 million; net interest income falls by about $0.5 millionCorrect
  2. BGap of +$50 million; net interest income rises by about $0.5 million
  3. CGap of -$50 million; net interest income rises by about $0.5 million
  4. DGap of -$350 million; net interest income falls by about $3.5 million

Explanation

Gap = rate-sensitive assets minus rate-sensitive liabilities = 150 - 200 = -$50 million. Change in NII = gap x change in rate = -50 x 0.01 = -$0.5 million. Option B reverses the sign of the gap; option C reverses the effect.

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