What is a 'Negative Gap'
A negative gap is a situation where a bank's interest-sensitive liabilities exceed its interest-sensitive assets. A negative gap is not necessarily a bad thing, because if interest rates decline, the bank's liabilities would get repriced at lower interest rates and income would increase. However, if interest rates increase, liabilities would get repriced at higher rates and income would decrease.
The opposite of a negative gap is a positive gap, where a bank's interest-sensitive assets exceed its interest-sensitive liabilities.
BREAKING DOWN 'Negative Gap'
Gap analysis offers a simplified way to determine a bank's interest-rate risk as it relates to repricing – the change in interest rate when an interest-sensitive investment matures. The size of a bank's gap indicates how much of an impact interest-rate changes will have on a bank's net interest income.