Gap risk
Regulatory Definition
Risk resulting from the term structure of interest rate sensitive instruments that arises from differences in the timing of their rate changes, covering changes to the term structure of interest rates occurring consistently across the yield curve (parallel risk) or differentially by period (non-parallel risk).
EBA GL/2022/14
What This Actually Means
Your assets and liabilities reprice at different times. If you've lent fixed for 5 years funded by overnight deposits, there's a gap between when your income resets and when your cost of funding resets. That timing mismatch is gap risk.
Where It Matters
This is the dominant IRRBB risk for most banks. It drives EVE sensitivity directly. A bank with long-dated fixed mortgages funded by short-dated deposits has significant gap risk — rates rise, funding costs jump immediately but mortgage income stays flat.
Classification grey area — deposit pass-through and behavioural floors: one of the most important and least clearly resolved questions in IRRBB classification is where deposit beta (pass-through rate) sits. The EBA framework places NMD repricing assumptions within gap risk, and that is the most defensible home: pass-through determines how quickly and fully the deposit cost reprices when rates move, which is fundamentally a repricing timing and magnitude question — the definition of gap risk.
Behavioural floors on managed rate products follow the same logic. A managed rate product that cannot practically go below zero is not an option in the meaningful sense — there is no contract, no defined strike, no hedgeable payoff profile. What it represents is a deposit beta that compresses toward zero as rates approach the lower bound. It is a non-linearity in the beta, not a written option, and it belongs in the same bucket as deposit betas: gap risk with a rate-dependent shape.
The practical test: if the non-linearity has a contractual trigger and a hedgeable payoff profile, it is option risk. If it is behavioural or managerial — the rate at which management chooses to reprice, or the point at which customers stop accepting lower rates — it is gap/beta risk, albeit with a non-linear character. See also option risk entry for the contractual floor distinction.