Interest Rate Gap

An interest rate gap is the difference between a firm’s interest-bearing assets and its interest-bearing liabilities.

If the gap is negative, liabilities are overshadowing assets. If the gap is positive, assets outweigh the firm’s liabilities. The worse the gap looks, the more hedging a firm will (hopefully) consider.

While the interest rate gap can be calculated for any business, it’s most common when we’re talking banks. Banks are in the business of the interest rate gap, borrowing at one rate and selling at another, higher rate, reaping the rewards from the interest rate gap as profit.