Repricing Model, its Uses and Limitations

If  a security in a specific maturity category is repriced within that time period it is known as repricing. The rate at which the assets or liabilities are repriced it is known as rate sensitivity. 


The Repricing Gap refers to the difference between the interest earned on the assets of a Financial Institution (FI) and interest paid on its liabilities in a certain time period. In other words, the Repricing Gap Model measures the gap between the assets and liabilities of an FI. Repricing model also measures the refinancing and reinvestment risk.

Repricing Model, its Uses and Limitations

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When Rate Sensitive Assets (RSA) are greater than Rate Sensitive Liabilities (RSL), then there is a positive gap which indicates the FI to have a reinvestment risk. In other words, there will be a fall in interest rate that reduces the net interest income of the FI. On the other hand, when RSA are RSL, there is a negative gap which indicates the FI to have a refinancing risk. In other words, there will be a rise in interest rate that leads to a reduction in the net interest income of the FI as it has more RSL. Repricing model is easy to understand and even small changes in interest rates can be measured with this. 

The main limitation of the Repricing model is that it only considers the book value and overlooks the effects of market values. It also overlooks the effects of runoffs and off-balance sheet cash flows. Moreover, it is not as accurate as duration model in measuring the interest risk rate.