CHAPTER 13 Banking and the Management of Financial Institutions GAP where RSA RSL RSA 335 (2) RSL rate-sensitive assets rate-sensitive liabilities In our example, the bank manager calculates GAP to be $20 million GAP $50 million $30 million Multiplying GAP times the change in the interest rate immediately reveals the effect on bank income: I where A PP LI CATI O N I i GAP (3) i change in bank income change in interest rates Gap Analysis Using the $30-million gap calculated using Equation 2, what is the change in income if interest rates rise by 1%? Solution The change in income is $300 000 I where GAP RSA RSL i change in interest rate GAP * i $30 million 0.01 Thus I $30 million 0.01 $300 000 The analysis we just conducted is known as basic gap analysis, and it suffers from the problem that many of the assets and liabilities that are not classified as ratesensitive have different maturities One refinement to deal with this problem, the maturity bucket approach, is to measure the gap for several maturity subintervals, called maturity buckets, so that effects of interest-rate changes over a multiyear period can be calculated The second refinement, called standardized gap analysis, accounts for the differing degrees of rate sensitivity for different rate-sensitive assets and liabilities