What is a gap or mismatch risk?

Gap or mismatch risk is the potential for financial loss arising from differences in the timing of interest rate changes (repricing) or maturities between a bank's assets (loans) and liabilities (deposits). It causes earnings volatility when interest rates shift, as income from assets may not align with the cost of funds.

What is gap or mismatch risk?

Gap risk is the risk that revenue and earnings decline as a result of changes in interest rates, due to the difference in the maturity profile of assets, liabilities and off-balance-sheet instruments. Another term for gap risk is mismatch risk.

What is an example of a mismatch risk?

Interest rate mismatch

For example, a bank might borrow money by issuing floating interest rate bonds, but lend money with fixed-rate mortgages. If interest rates rise, the bank must increase the interest it pays to its bondholders, even though the interest it earns on its mortgages has not increased.

What is an example of a gap risk?

An example of this when a company reports earnings while the stock market is closed. This can cause pressure on the stock price such that by the time the stock market opens the next day, it can be trading at a different price than it was trading for at the end of the prior day.

What is a gap in risk management?

Gap analysis is a systematic approach to evaluating the differences between an organization's current state and its desired future state. This method identifies areas of improvement, discrepancies, and potential risks that might hinder achieving goals.

Managing Interest Rate Risk - Duration Gap Analysis

What are the 4 types of gaps?

The four main types of gaps are common gaps, breakaway gaps, runaway gaps, and exhaustion gaps, each carrying distinct implications for market trends.

What is the difference between risk and gap?

Differences Between Gap Analysis and Risk Assessment

A gap analysis aims to identify areas of improvement or potential risks that may affect operations. Risk assessment aims to identify and prioritize areas of risk so actions can be taken to mitigate them.

How can gap risk be managed?

Managing Gap Risk

Swing traders can minimize their gap risk by not trading or closing open positions before a company reports its earnings.

What are the risks of maturity mismatch?

Results show that increased maturity mismatch increases corporate financial risk, with financial flexibility mediating this effect. Maturity mismatch may lead to liquidity risk and reduce a firm's cash-holding ability, while credit supply constraints can weaken residual liability capacity in financial flexibility.

What are the 4 types of market risk?

What are the main types of market risk? The main types of market risk are equity risk, interest rate risk, currency risk, and commodity risk. Each type involves potential losses from fluctuations in stock prices, interest rates, exchange rates, and commodity prices, respectively.

What is an example of a mismatch?

Mismatch is also a verb that means "match up badly," like when you mismatch your red shirt with your purple pants. Sometimes sports matches or games are called mismatches too, when one team is clearly superior to the other.

What is matching in risk management?

Duration matching is a risk management strategy, commonly used in the insurance industry, where the duration (price sensitivity to a yield curve movement) of an asset portfolio is adjusted to be made equal to the duration of the liability. This is done under that assumption that doing so eliminates interest risk.

What is an example of mismatch risk?

financial institutions are concerned about the interest rates on assets and liabilities resetting at different • times. This is known as mismatch risk or repricing risk. For example, if the interest rates on its assets increase more than its liabilities then the organisation's profit will increase, and vice-versa.

What is the full meaning of gap?

an empty space or interval; interruption in continuity; hiatus. a momentary gap in a siren's wailing; a gap in his memory. Synonyms: lull, interlude, break, interstice, pause. a wide divergence or difference; disparity. the gap between expenses and income; the gap between ideals and actions.

What are the 5 gaps in the gap model?

The Gap Model of Service Quality is a framework that helps businesses identify and close gaps between customer expectations and actual service delivery. It highlights five key gaps: Knowledge Gap, Policy Gap, Delivery Gap, Communication Gap, and Customer Gap.

What are the 4 types of risk in banking?

Major risks for banks include credit, operational, market, and liquidity risk. Since banks are exposed to a variety of risks, they have well-constructed risk management infrastructures and are required to follow government regulations.

What are the 3 C's of credit risk?

Character, capital (or collateral), and capacity make up the three C's of credit. Credit history, sufficient finances for repayment, and collateral are all factors in establishing credit.

What is an example of a maturity risk?

Maturity risk refers to the risk associated with the length of time until a bond matures and is repaid. The longer the time until maturity, the greater the maturity risk. For example, consider two bonds - Bond A matures in 5 years while Bond B matures in 30 years.

What are the four types of gap analysis?

Let's explore the four main types in detail:

• Performance Gap Analysis. ...
• Market Gap Analysis. ...
• Competitive Gap Analysis. ...
• Product Gap Analysis. ...
• Performance Gap Analysis. ...
• Market Gap Analysis. ...
• Competitive with Gap Analysis. ...
• Product Gap Analysis.

What are the 4 types of interest rate risk?

There are four types of structural interest rate risk. As defined in the Basel paper, the four risks are repricing (mismatch), yield curve, basis and optionality. Repricing or mismatch risk is created when fixed rate loans are funded by variable rate borrowings or when fixed rate deposits fund variable rate loans.

Is a swot analysis a gap analysis?

A SWOT (strengths, weaknesses, opportunities, threats) analysis can be seen as a type of gap analysis because it details where a company currently stands. It allows a company to see what it does well and what it does not do well, and thereby determine a way to improve the latter.

What are the 5 control measures?

They are arranged from the most to least effective and include elimination, substitution, engineering controls, administrative controls and personal protective equipment.

How to perform a gap analysis in 5 steps?

How to conduct a skills gap analysis: A 5-step guide

1. Step 1: Define the Scope and Goals. ...
2. Step 2: Identify Crucial Skills for Now and the Future. ...
3. Step 3: Measure Current Skills and Collect Data. ...
4. Step 4: Analyze the Gaps and Prioritize. ...
5. Step 5: Create and Implement an Action Plan.