Gap Analysis
Purpose
Gap analysis enables banks to monitor and manage interest rate risks from transactions so they can make strategic decisions with regard to gap positions for defined points in time. Liquidity analysis and the cash flow evaluation enable banks to manage their liquidity requirements and NPV risks.
In contrast to NPV analysis, where risks are recorded using NPVs and future values, in gap analysis, position and maturity volumes as well as cash flows and liquidities are displayed on key dates or for periods. The gap positions, interest rate risk, currency risk, and liquidity risk that are disclosed in this way are then displayed.
You can carry out gap analysis for single transactions or for user-defined segments in a segment hierarchy. In reporting, you can switch between different segment hierarchy levels and display the results by different cash flow views, market data scenarios, and currencies.
The Strategy Analyzer gap analysis includes the following evaluations:
The system compares the development of lending and borrowing positions from both the balance sheet and off-balance-sheet areas. You can carry out both a key date position evaluation and an average position evaluation.
The system shows the NPV interest rate risk by using; the fixed-rate cash flows. You can restrict the evaluation to particular currencies.
The system displays the NPV interest rate risk; the cash flows cash flows are displayed only up to the time point at which the interest rate was fixed. You can restrict the evaluation to particular currencies.
The system depicts the incoming and outgoing payments for the capital tie-up. In contrast to the cash flow evaluation, only incoming and outgoing payments that are expected to be realized are displayed.
The system displays the NPVs of a portfolio or the associated cash flows in the maturity band. You can also use market data scenarios in the analysis. You can calculate full scenarios and delta scenarios.
Net interest income evaluation
The system calculates the potential net interest income for each maturity band. The capital tie-up is used as the basis for this. For variable items, the interest revenue or the interest expenses that has not been determined is calculated using the forward interest rate.
If the default setting is used, the system does this in all evaluations. In gap analysis, you can specify that the system does this for certain evaluations only in order not to impair system performance. For more information, see Creating Valuation Runs.
You can use gap analysis as follows:
● To display the interest rate risk as a potential negative deviation in the net interest income per period from the expected net interest income per period
● To display position volumes for key dates and for periods and maturity volumes for key dates and periods in terms of their fixed interest rates and capital tie-up, and to display fixed-rate cash flows and incoming and outgoing liquidity
● To display gap positions as a comparison of the volume of lending and borrowing positions, and maturity volumes, as well as incoming and outgoing cash flows or liquidity flows
● To analyze positions, maturity, and cash flows from fixed-rate items for any subportfolio on a daily basis
● To display the net interest income for old business whilst using scenarios
● To include variable items without a fixed-interest period by means of due date scenarios (demand deposits and savings deposits) and forwards (for example, floaters, the variable side of swaps and forward rate agreements) in the analyses
● To include non-interest-bearing items without a fixed-interest period by using due date scenarios (for example, equity, provisions, land, and buildings) in the analyses
● To include optional interest rate instruments and their underlyings or delta-weighted underlyings (for example, forward swaps for swaptions, (fictitious) bonds for OTC interest rate options, options on futures) in the analyses
● To display the results distributed over maturity bands, which can be subdivided into any time period, for example, day, month, quarter, half-year, and year
Example
An interest rate risk exists, for example, if a fixed interest rate gap exists in the lending positions for a particular currency. The diagram below illustrates this:
In the closed fixed interest rate block area, there is no risk because the product interest rates of the assets and liabilities are not affected by the market interest rates. The net interest income is therefore not affected by changes in the market interest rate. In the closed variable-rate block, it is assumed that the changes in the market interest rates are reflected in both the asset-side and the liability-side items, meaning that the final net interest income is unchanged in this block too.
Therefore, the actual risk is seen in the area of the fixed interest rate gap; in the area under “Assets” in this example. If, for example, the interest calculated for the variable-rate liabilities increases as a result of increases in the market interest rate, then you expect a decrease in the net interest income.
Prerequisites
Settings have to be made for the gap analysis in Customizing for the General Calculation and Valuation Methods and for Strategy Analyzer. For information about this, see Strategy Analyzer Architecture.
Process Flow
Depending on the volume of the data you want to analyze, you should either start the gap analysis immediately (online processing) or schedule it for a later date (batch processing).
The analysis is called immediately, and the report is generated straight away. This type of analysis is suitable for small volumes of data only.
The aggregation run is called immediately on the basis of a valuation run that has already been carried out. The results are displayed straight away.
The gap analysis and the reports are scheduled to run at a later point in time. This method is recommended for large volumes of data.
The system stores the results of the gap analysis in the Results Database (RDB). Reporting is carried out in SAP NetWeaver Intelligence (BI) or the SAP List Viewer (ALV).