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NET INTEREST INCOME AND INTEREST RATE GAPS

The example below calculates directly the N11 with two interest rate scenarios and checks the consistency with the gap model. For making calculations simple, we use assumptions that are not restrictive: Constant commercial spreads and a shift of a flat term structure of rates. The assumptions are not restrictive since we could use gaps for each interest rate reference and differentiate spreads.

Table 23.2 provides a sample set of data for a simplified balance sheet, projected at date 1, one year from now. There is no need to use the balance sheet at date zero for gap calculations. All subsequent interest revenues and costs calculations use the end of year balance sheet. We assume that there is no hedge contracted for the forthcoming year. Note that the projected balance sheet is such that both interest rate gaps and liquidity gaps are open. Both should be considered for interest rates gap calculations since open liquidity gaps generate an interest rate position.

Projected Gaps

The gaps result from the one-year balance sheet projections (Table 23.3). All gaps are algebraic differences between assets and liabilities. The liquidity gap shows a deficit of 12. The variable rate gap before funding is +8, but the deficit of 12 counts as a variable rate liability as long as its rate is not locked in advance, so that the post-funding variable interest rate gap is -4.

TABLE 23.2 Balance sheet projections for the banking portfolio

Balance sheet projections for the banking portfolio

TABLE 23.3 Gap calculations

Gap calculations

Liquidity gaps are as algebraic differences between assets and liabilities.

interest rate gaps are interest sensitive assets minus interest sensitive liabilities, or 'Variable rate" interest rate gaps. 'Funding is assumed to be variable rate before any hedging decision is made.

 
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