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FRM Part I · FRM Exam Part I · Banks

A bank's one-year repricing gap (rate-sensitive assets minus rate-sensitive liabilities) is negative USD 120 million. Which outcome is most consistent with this position?

Net interest income falls if rates rise. A negative one-year gap means more liabilities than assets reprice within the year, so funding costs increase by more than interest income does when rates go up. The bank benefits when rates fall.

  1. ANet interest income rises if market rates rise
  2. BNet interest income falls if market rates riseCorrect
  3. CNet interest income is unaffected by parallel shifts
  4. DNet interest income falls if market rates fall

Explanation

With negative gap, more liabilities than assets reprice within the year. Rising rates raise funding costs more than asset income, so net interest income falls. Falling rates would help, not hurt.

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