A bankâ€™s overall â€œGapâ€ (as opposed to the monthly measure explained in class) calculates the difference between the (average) maturity of its assets and its liabilities. This is a measure of risk, because if, for example, a time deposit matures and the loan that was made with that deposit money does not mature yet, the bank must â€œrolloverâ€ (issue another deposit) at an interest rate that might be much higher (which compresses, and may even make negative, the interest margin.
Suppose the maturities are as follows: Loans 1 year, Bonds 2 years, Demand deposits 0, Time deposits 6 months Inter-Bank debt 3 months
Calculate the Gap by: ? multiplying each asset by its maturity and summing them ? multiplying each liability by its maturity and summing ? subtracting the latter from the former ? dividing by total assets