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

The income statement GAP is a measure used to evaluate the sensitivity of a bank's earnings to changes in interest rates over a specific time frame. It primarily focuses on assets and liabilities that reprice (or adjust) in relation to interest rate fluctuations. Understanding this concept is essential in identifying how changes in interest rates can impact a financial institution's net interest income and overall profitability.

While the first choice highlights the impact of changes in interest rates, the correct understanding of income statement GAP includes not only this effect but also incorporates other factors such as volume changes in rate-sensitive assets and liabilities. Therefore, the more comprehensive answer captures the essence of how income statement GAP considers all relevant elements that affect income following shifts in interest rates.

In summary, the income statement GAP takes into account the implications of volume changes in rate-sensitive assets, the effects of interest rate shifts, and other dynamics like mortgage prepayments which can influence cash flows and interest margins. Thus, a more complete understanding of the concept would lead to recognizing all the factors that contribute to earnings sensitivity when identifying the effect of interest rate changes on bank income.