Funding Gap Analysis

Funding gap analysis is a liquidity management technique that compares the cash an institution expects to receive with the cash it expects to pay out, grouped into time periods, to find where it will need new funding. The result for each period is the funding gap, and the running total across periods is the cumulative gap. Banks use it as a core tool of liquidity risk management, and corporate treasurers, finance companies and payment firms use similar methods to plan borrowing.

The term is also used more loosely for the structural difference between a bank's loans and its customer deposits, which shows how much the bank relies on market funding. Funding gap analysis sits beside regulatory ratios such as the liquidity coverage ratio, and is distinct from repricing gap analysis, which looks at when interest rates reset rather than when cash moves.

A household can list the money coming in and going out each month for the next year. Most months balance, but December, with gifts and an insurance bill, shows more going out than coming in. Knowing that in advance means arranging savings or an overdraft in good time, rather than scrambling at the last moment.

A bank does the same on a much bigger scale. It sorts everything it expects to receive and pay, from loan repayments to deposit withdrawals, into time slots such as next week, next month and next year. Where outflows exceed inflows, there is a gap the bank must fill by borrowing, selling assets or drawing on its reserves.

Cash flows are placed in a maturity ladder of time buckets. For each bucket $t$:

and the cumulative gap is the sum of all gaps up to that bucket. A negative cumulative gap shows the amount of funding that must be raised or covered by liquid assets by that date. A simple example for a small bank, in millions:

The bank must cover a $60 million shortfall in the first month, for example from its liquidity buffer of unencumbered assets, even though over a full year inflows exceed outflows by $20 million.

The structural version is simpler: funding gap = loans − customer deposits. A bank with loans of $10 billion and deposits of $8 billion has a $2 billion gap that must be met from bonds, interbank borrowing or equity.

A purely contractual ladder treats every current account as repayable tomorrow and every loan as repaid on its final date, which gives an unrealistic picture. Banks therefore also build behavioural ladders that assume most retail deposits stay, that some wholesale deposits leave quickly, that committed credit lines are drawn and that some loans are repaid early. Stress versions apply harsher assumptions, such as a ratings downgrade or a market closure, to see how long the bank could survive. These results feed the contingency funding plan, which sets out the actions the bank would take if gaps opened.

• Setting limits. Banks set limits on cumulative gaps in short buckets and on dependence on particular markets, linked to funding concentration reporting.
• Planning issuance. Treasury uses the gaps to plan when to issue bonds, raise term deposits or use securitisation.
• Supervisory reporting. The Basel III liquidity framework includes a contractual maturity mismatch report among its monitoring tools, and many supervisors require maturity ladders in regular returns.
• Non-bank firms. Lenders, fintechs and payment firms use gap analysis with cash forecasting to make sure they can meet payouts and repay credit lines.

The analysis complements the net stable funding ratio, which measures structural funding over a one-year horizon, and reflects the maturity transformation at the heart of banking.

Results depend on assumptions about customer behaviour that may fail in a crisis, as rapid withdrawals of uninsured deposits in 2023 showed. A ladder is a snapshot that can change daily, and it may miss intraday needs, collateral calls and currency mismatches unless these are modelled separately. It also says nothing about the cost of closing a gap, which can rise sharply when markets are stressed.