book that is composed solely of liabilities that re- price in one months time, and an equal cash value of assets that re- price in 11 months time. The 1-year gap of the book (assuming no other positions) would be zero, implying no risk to net interest income. In fact, under our scenario the net interest income is signifi- cantly at risk from a rise in interest rates; ■ maturity gap models assume that interest rates change by a uniform magnitude and direction. For any given change in the general level of interest rates however, it is more realistic for different maturity inter- est rates to change by different amounts, what is known as a non-par- allel shift; ■ maturity gap models assume that principal cash flows do not change when interest rates change. Therefore it is not possible to effectively incorporate the impact of options embedded in certain financial instru- ments. Instruments such as mortgage-backed bonds and convertibles do not fall accurately into a gap analysis, as only their first-order risk exposure is captured.   Not withstanding these drawbacks, the gap model is widely used as it is easily understood in the commercial banking and mortgage industry, and its application does not require a knowledge of sophisticated finan- cial modelling techniques. CHAPTER14 BankRegulatoryCapital   he primary players in the global money markets are banking and finan- cial institutions which include investment banks, commercial banks, thrifts and other deposit and loan institutions. Banking activity and the return it generates reflects the banks asset allocation policies. Asset allo- cation decisions are largely influenced by the capital considerations that such an allocation implies and the capital costs incurred. The cost of cap- ital must, in turn, take into account the regulatory capital implications of the positions taken by a trading desk. Therefore, money market partici- pants must understand regulatory capital issues regardless of the products they trade or they will not fully understand the cost of their own capital