Banking Practice Exam

Static GAP analysis is a tool used by banks to assess interest rate risk by analyzing the differences between assets and liabilities that will reprice within a certain time frame. The correct answer highlights several advantages of this analytical method.

One key advantage is that static GAP analysis indicates the specific balance sheet items that are responsible for interest rate risk. By examining the timing of repricing for both assets and liabilities, banks can pinpoint where the mismatches occur, allowing them to understand which parts of their balance sheet are most sensitive to changes in interest rates. This distinction is crucial for managing and mitigating risk.

Another advantage is that it considers the cumulative impact of interest rate changes. Static GAP analysis helps institutions understand how the overall balance sheet will react to shifts in interest rates over multiple periods, thus providing insights into the potential future performance of the bank under different interest rate scenarios.

However, static GAP analysis does not account for the time value of money. This aspect is essential in many financial analyses, as it acknowledges how the value of money changes over time due to earning potential and inflation. Although it has its limitations, the primary strengths of static GAP analysis lie in its ability to focus on the relationship between assets and liabilities and the direct exposure to interest rate changes.

Overall, the answer