The bank has a negative repricing gap.Is it exposed to interest rate increases or decreases and why?
A)Interest rate increases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise.
B)Interest rate increases because the interest income on its assets will rise by less than the interest expenses on its liabilities and net interest income will fall.
C)Interest rate decreases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise.
D)Interest rate decreases because the interest income on its assets will rise by less than the interest expenses on its liabilities and net interest income will fall.

Question

Quizplus · Accepted Answer

A negative repricing gap means that the bank's interest-sensitive liabilities reprice (or mature) more quickly than its interest-sensitive assets. Therefore, if interest rates increase, the bank's interest expenses on its liabilities will increase more quickly than its interest income on its assets. This will result in a decrease in net interest income and expose the bank to interest rate increases. Option B correctly identifies this scenario. Option A is incorrect because it suggests that the bank will benefit from an increase in interest rates, which is not the case with a negative repricing gap. Option C is incorrect because a decrease in interest rates will not benefit the bank with a negative repricing gap. Option D is incorrect because it suggests that a decrease in interest rates will result in a decrease in net interest income, which is not the case with a negative repricing gap.

The Bank Has a Negative Repricing Gap