Zero-Gap Condition

Think of a scale. Like...the scales of justice. For a financial company, having their assets and liabilities in balance is ideal. This delicate, beautiful balance is known as the zero-gap condition.

Let’s talk assets. While there are assets that aren’t really going to change in value much (think: physical office things), financial companies do have many assets that are sensitive to changes in interest rates...since they deal in investments and debt and various monetary instruments.

"Liabilities," as used here, is kind of the same thing as "credit owed" for an individual like you. For instance, if you use a credit card, you now owe some debt. Likewise, if a company buys some stuff from a supplier on credit, that means they now have a liability, or an obligation, to pay some debt owed.

Financial institutions in general deal a lot in liabilities. They have the typical ones most businesses have for running offices and such, but they also have many more, since dealing in loans is, uh...kind of their thing. Yep, banks and financial institutions not only collect money from loans, but they also often are paying off their own loans.

When these assets and liabilities are equal, it means they don’t have a surplus or a shortfall. Financial institutions try to keep things in the zero-gap condition, because if they didn’t, their worth would be fluctuating all over the place, which makes them look untrustworthy to the rest of us, like a risky stock. They use what’s called in the biz “immunization strategies” to keep the zero-gap condition on stat. Well...they try, anyway.