What is repricing gap analysis and what are its limitations?

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AcadiFi · Accepted Answer

Repricing gap analysis groups assets and liabilities into time buckets based on when they next reprice, then computes the gap (assets minus liabilities) in each bucket. A positive gap in the 0-3 month bucket means the bank has more assets than liabilities repricing soon, so a rate rise would increase NII short-term. Cumulative gaps through six or twelve months summarize earnings exposure. Example buckets might be 0-30 days, 1-3 months, 3-6 months, 6-12 months, 1-3 years, and over 3 years. Gap analysis is simple, quick, and integrates with core banking systems. Its limitations are severe. First, it ignores the magnitude of rate moves within a bucket — a loan repricing at day 1 and one repricing at day 29 are treated identically. Second, it ignores basis risk because everything is assumed to move by the same amount. Third, it assumes parallel yield curve shifts. Fourth, it cannot handle optionality: prepaying mortgages, non-maturity deposits, or convertible securities are shoehorned into buckets using heuristics. Fifth, it measures income not economic value — a deep EVE loss may hide behind a balanced short-term gap. ```mermaid flowchart LR B[Balance sheet] --> G[Bucket by
reprice date] G --> P[0-3M gap] G --> Q[3-12M gap] G --> R[1Y+ gap] ``` Modern ALM supplements gap with duration gap, EVE scenarios, and dynamic NII simulation. Gap remains useful as a quick-read management report but is no longer sufficient for regulatory IRRBB.

What is repricing gap analysis and what are its limitations?

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