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

To understand why the correct answer is that a decrease in 3-month CDs and an offsetting increase in 3-year CDs will cause a bank's 1-year cumulative GAP to increase, it's important to understand the concept of GAP analysis. The cumulative GAP measures the difference between the amount of assets and liabilities that reprice in a given time frame; in this case, within one year.

When 3-month CDs, which are liabilities that will reprice in three months, are decreased, it means that there is less liability that will be coming due soon. This may initially seem like it would not significantly impact the net GAP; however, since those liabilities are being offset by an increase in 3-year CDs, which will not reprice for a longer period, the balance of the bank's liabilities becomes more weighted towards longer-term repricing schedules.

Since the decrease in short-term liabilities (the 3-month CDs) reduces the amount of liabilities that will reprice within the next year, while the increase in long-term liabilities (the 3-year CDs) does not contribute to the short-term repricing, the net effect is an increase in the cumulative GAP. This situation tends to create a more favorable position for the bank if interest rates rise