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Originally published 4/21/2008 © 2021 Olson Research Associates, Inc.
I usually respond to this (quietly and to myself)...AAUGH! (My favorite Charlie Brown quote.)
Anybody that's read my prior posts on the subject of the gap report will know my opinion. As a tool for measuring interest rate risk, the gap report just doesn't cut it.
We do however still show a base-case gap report in our result set. We don't use it to measure the bank's interest rate risk. We don't even collect peer statistics on the one-year cumulative gap. We don't because there are too many weaknesses in the measurement.
We run an income simulation which models the future principal and interest flows generated by the bank's balance sheet. These flows include contractual maturities, repricings, amortizing principal payments, principal prepayments, and calls. All of these flows impact the overall timing and ultimate earnings power of a portfolio; therefore we show these flows on our base-case gap report. On a "traditional" gap report banks usually report the entire principal balance at either final maturity or next reprice date. But doing so ignores usually significant principal flows (again: amortizing flows, prepaying flows, calls).
That's the difference, and that's why, "our model's gap report will never match your call report."
There is an interesting little comment buried deep in the FFIEC's instructions for filling out the call report. Here the regulators comment on this issue of amortizing payments and prepayments:
That's government speak for, "If you have the data to show amortizing payments (or prepayments) you may adjust the call report data." Most bank's never do this, but it would greatly improve the gap data (for what it's worth.)
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