duration gap
The difference between the duration of a bank's assets and liabilities, measuring interest rate risk — a large gap means interest rate changes have an outsized impact.
Example
“Silicon Valley Bank's large duration gap — long-duration bonds funded by short-term deposits — made it vulnerable to rate rises.”
Memory Tip
DURATION GAP = mismatch between asset and liability duration. A big gap = big interest rate risk.
Why It Matters
Duration gap matters because it directly affects how your savings and investments respond to interest rate changes. If you have a large duration gap in your financial situation, rising or falling rates could dramatically impact your wealth and income, making it harder to plan for the future.
Common Misconception
Many people assume that holding bonds or savings accounts means they are protected from interest rate risk. In reality, if you owe long-term debt but hold short-term savings, you face significant duration gap risk that can erode your net worth when rates change.
In Practice
Consider a bank holding 100 million dollars in 10-year bonds (average duration of 8 years) but owing 100 million dollars in deposits that customers can withdraw in 2 years (average duration of 1 year). The duration gap is 7 years, meaning if interest rates rise by 1 percent, the bond value drops by roughly 8 million dollars while the liability cost increases by only 1 million dollars, creating a 7 million dollar loss.
Etymology
DURATION (interest rate sensitivity) GAP (difference). The GAP between asset and liability DURATIONS.
Common Misspellings
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Related Terms
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See Also
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