DEFINITION of 'Dynamic Gap'

Refers to asset and liability risk management at financial institutions. An asset-liability model that takes into account projected future balances or the difference between interest sensitive assets and interest sensitive liabilities at specific future time periods. Simply: a bank's gap is defined as the difference between a bank's rate-sensitive assets and rate-sensitive liabilities.

BREAKING DOWN 'Dynamic Gap'

Gap analysis is the method to determine the market risk, or interest rate exposure. Dynamic gap analysis attempts to reflect the reality that, on an ongoing basis, loan payments and maturities are replaced with new loans; deposit withdrawals are replaced by new deposits. It is the opposite of static gap analysis.


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