Banking Practice Exam 2025 - Free Banking Practice Questions and Study Guide

When a bank has a positive GAP, it means that the interest-sensitive assets surpass the interest-sensitive liabilities. In this context, an increase in interest rates will typically lead to an increase in interest income as the bank earns more on its assets. Since the assets reprice faster or to a greater extent than the liabilities, the interest income will see a more pronounced rise.

On the expense side, the bank’s interest expense is likely to decrease in relation to the interest income. This occurs because the bank may have locked in lower rates for some of its liabilities, which do not adjust as quickly, or it may have less of its liabilities maturing compared to its assets. Consequently, while the income from assets increases significantly, the expenses from liabilities do not increase at the same rate or may indeed decrease.

This dynamic causes net interest income to increase as well. The bank's earnings from the spread between interest income and interest expense widens when the income rises significantly while expenses remain stable or drop.

Thus, when assessing the consequences of a positive GAP in the context of rising interest rates, it follows that interest income increases, interest expense decreases, and net interest income ultimately increases as well.