What does a gap of less than 0 indicate in financial terms?

A gap of less than 0 in financial terms indicates that the interest rate-sensitive liabilities exceed the interest rate-sensitive assets. This situation is significant for financial institutions, particularly banks, as it suggests that a rise in interest rates could lead to a decrease in net interest income. When liabilities are more sensitive to interest rate changes than assets, the financial institution may find itself in a position where increasing rates lead to more costly obligations compared to income generated from assets.

This condition highlights a potential risk, as the institution might struggle to maintain profitability if the yield on its assets does not increase at the same rate as the costs associated with its liabilities. Understanding this dynamic is crucial for financial management, as it affects decisions regarding interest rate risk exposure and asset-liability management strategies.

The other options do not accurately represent the implications of a negative gap. For instance, a gap greater than 0 would indicate the opposite scenario, with assets exceeding liabilities, and a gap of exactly 0 suggests a balanced situation, which does not apply when the gap is negative. Therefore, recognizing the significance of a negative gap is essential for effective financial risk management.