Banking winners and losers in a rising interest rate environment

July 26th, 2018 banks and the one year gap ratio

In any given year, there will be assets that are set to reprice, and there are liabilities set to reprice. The difference between these two amounts as a percentage of total assets is called the one-year gap ratio.

This ratio is particularly interesting for investors studying banks in a rising interest rate environment like the one we are currently experiencing in 2018, with the fed signaling two more rate increases this year alone. Banks with a higher gap ratio should benefit more from from these macroeconomic conditions.

According to the Wall Street Journal, talking about the one-year gap ratio, "For 22 large-cap banks, the median ratio stood at 31% in 2017, up from 27% five years earlier. This indicates that banks have been preparing for higher interest rates by shifting into short-term assets that reprice quickly."

The gist is that some of the bigger banks with more business in shorter-term could be the benefactors of ongoing Federal Reserve Policy. The industry standout by this basis of its one-year gap ratio is Comerica because of its short-term business lending. Ally, which is down for the year, happens to have a negative one-year gap ratio.