what is a negative gap 
a negative gap is a situation where a financial institution s interest sensitive liabilities exceed its interest sensitive assets a negative gap is not necessarily a bad thing because if interest rates decline the entity s liabilities are repriced at lower interest rates in this scenario income would increase however if interest rates increase liabilities would be repriced at higher interest rates and income would decrease the opposite of a negative gap is a positive gap where an entity s interest sensitive assets exceed its interest sensitive liabilities the terms of negative and positive gaps which analyze interest rate gaps are also known as duration gap understanding a negative gapnegative gap is related to gap analysis which can help determine a financial institution s interest rate risk as it relates to repricing i e the change in interest rates when an interest sensitive investment matures the size of an entity s gap indicates how much of an impact interest rate changes will have on a bank s net interest income net interest income is the difference between an entity s revenue which it generates from its assets including personal and commercial loans mortgages and securities and its expenses e g interest paid out on deposits negative gap and asset liability managementa negative gap is not necessarily either good or bad but it is a measure of how much a bank is exposed to interest rate risk understanding this metric is a component of asset liability management which banks must consider in their operations gap analysis as a method of asset liability management can be helpful in assessing liquidity risk in general the concept of asset liability management focuses on the timing of cash flows it looks at when cash inflows are received versus when payments on liabilities are due and when the liabilities present a risk it aims to ensure that the timing of liability payments will always be covered by cash inflows from the assets asset liability management is also concerned with the availability of assets to pay the liabilities and when the assets or earnings may be converted into cash this process can be applied to a range of categories of balance sheet assets 