What is indicated by a positive Gap value?

A positive Gap value indicates that rate-sensitive assets exceed rate-sensitive liabilities. This is an important measure in the context of financial institutions, particularly banks, as it reflects their exposure to interest rate risk. When the value of rate-sensitive assets is greater than that of rate-sensitive liabilities, it suggests that the institution will benefit from rising interest rates. In such scenarios, increases in rates could lead to higher interest income from loans and investments compared to the interest expense on deposits and borrowings.

In contrast, if rate-sensitive liabilities were to exceed rate-sensitive assets, the financial institution would face a greater risk when interest rates rise, as it could lead to reduced net interest income. A situation of equal rate sensitivity means that assets and liabilities are balanced in terms of interest rate exposure, and the institution would not experience significant gains or losses from interest rate changes. Lastly, a complete lack of rate-sensitive investments would imply no exposure to interest rate changes at all, which is not represented by a positive Gap value. Thus, the positive Gap effectively signals a favorable alignment for those institutions that expect interest rates to rise.