The Interest Rate Gap Definition and the Risk Measurement

In the Polish literature on interest rate risk management, two views exist side by side on the impact of the so-called interest rate gap (otherwise known as the net mismatch position) on the risk borne by banks. According to one concept, a positive interest rate gap poses a threat of worsening interest income when interest rates fall [Bereza, 1992; Gup, Brooks, 1997; Świderski, 1998; Uyemura, Deventer, 1997] and, according to other authors, when they rise [Fedorowicz, 1996; Iwanicz-Drozdowska, Nowak, 2001; Zawadzka 1999]. However, if the described way of determining the interest rate gap is the same in both cases, then either of these views must be wrong or refer to different aspects of interest rate risk management (e.g. static or dynamic treatment). This fact, in itself, would probably not be very controversial, after all, many financial terms are defined differently, if it were not for the contradictory conclusions for interest rate risk management practice arising from the application of the proposed method. Therefore, the purpose of this article is to resolve the above issue, i.e. to determine whether the gap concept under consideration has the same meaning for both groups of authors and what conclusions result from this for the practice of risk management.