Duration Gap Risk Management in Commercial Banks

Traditional duration gap models can only capture the sensitivity of net worth to interest rate changes but struggle to reflect the dynamic impact of client behavior and liquidity constraints in crisis scenarios. To address the model’s deficiency in characterizing liquidity risk, this study introduces a client-run factor ( $$\lambda$$ λ ) and a liquidity coverage factor ( $$\theta$$ θ ), constructing an extended duration gap measurement framework incorporating these factors. It further proposes a “Dynamic Duration Gap” model to capture the evolution of risk over short-term time horizons (t). Based on the case of the typical failed bank, First Republic Bank (FRB), this paper analyzed its financial statements and regulatory disclosure data before collapse, calculating its dynamic risk exposures under the new model, revealing the resonance mechanism between market interest rate shocks and client panic behavior. The research results indicate that the intensification of client run behavior, and the continuous depletion of high-quality liquid assets (HQLA) significantly amplified the actual interest rate risk exposure of both banks and accelerated the onset of its liquidity crisis. This model not only addresses the shortcomings of traditional duration analysis in crisis response but also provides an operable quantitative tool for commercial banks to conduct internal stress testing and for regulators to refine micro prudential assessment frameworks.