Dynamic Gap

We'd say Michael Strahan and Anna Paquin have dynamic gaps, at least dentally speaking. Whoever decided it was necessary to constantly remind London Underground commuters to "mind the gap" certainly thinks that's a dynamic example. But here, we're talking about a way to measure bank finances.

There are two sides to a bank's business. They provide loans, which means they let people borrow money and earn interest when they get paid back. They also take in deposits, which basically means they borrow money from a bunch of regular folks and pay out (not much) interest for the privilege.

These two sides of the bank's business can be described in terms of assets and liabilities. The bank holds a certain amount of money in deposits (the assets part). It also has money out in the world that people owe it (the liabilities part). The "gap" is the difference between the assets and liabilities.

This gap can be measured in two ways. There's the static method and the dynamic method. The static method takes a snapshot of the gap at any particular time. Meanwhile, the dynamic method attempts to track the constant widening and narrowing that the gap undergoes as bank accounts are opened and closed, and as loans are approved and paid back.

The dynamic gap, therefore, seeks to measure this ebb and flow over time. It involves modeling and predicting the rate of account openings and closings, as well as the pace of loan activity. It also takes into account differences in interest rates between deposits and loans, not to mention the difference in interest rates for various types of loan products.