In addition to the balance sheet, the Treasurer has determined that the weighted average duration of the bank'sQuestion Five

a$)$ Explain the sources of interest rates in a typical banking book of a bank. $(5$ marks$)$

b$)$ Elsie Mensah is a Treasurer of Ansaba Bank Limited. During ALCO last month

members expressed concern about the continuous increase in interest rates over the

next $1$ year and its impact on the bank's net interest income. The Treasurer was

therefore tasked to make a presentation to ALCO at the next monthly meeting on

the interest rate risk the bank currently has and what should be done to hedge this

risk.

She has gathered the following extracts from the bank's balance sheet as at $30$ th June

Assets

Consumer loans $-$ GHS $300m,7$ year maturity with rates fixing every $3$ months

Corporate Loans $-$ GHS $250m,2$ year tenor with $6$ months rate fixing.

Mortgage Loans$-$GHS $100m,25$ year maturity with $1$ year rate fixing

Fixed rate loans $-$ GHS $650m,5$ year personal loans.

Government Securities$-$GHS $150$ m $91$ day, $200$ m $182$ day and $2$ year $140$ m bond.

Interbank Lending$-$GHS $50$ m invested for $1$ week

Fixed assets$-$GHS $120$ m

Cash$-$GHS $140$ m

Liabilities

Current Accounts $-$ GHS $200$ m

Savings Accounts $-$ GHS $150$ m

Time Deposits $-$ GHS $550$ m with $12$ months maturity

Negotiable Certificate$-$GHS $300$ m months maturity

Interbank borrowings $-$ GHS $200$ m with $7$ days to mature

Subordinated debt$-$GHS $200$ m with rates fixing every $6$ m ths

Equity $-$ GHS $400$ m

You are required to:

i$)$ Calculate the $12$ months Rate Sensitive Assets $($RSA$),$ Rate Sensitive

Liabilities and Re$-$pricing gap.

ii$)$ Calculate the impact of a $300$ basis point increase in interest rate on the

bank's net interest income over the next $12$ months

$(5$ marks$)$

iii$)$ Calculate the impact on the bank's net interest income if as a results of

increase in market interest rates, asset rates increase by $400$ bps whilst

liability rate increase by $300$ bps $.$

iv$)$ Briefly highlights the bank can do to minimize its interest rate risk

position.

assets is $5$ years whilst that of its deposits is $3$ years. The current $1-$year interest rates is $16\%$ and is forecasted to

decline to $14\mathrm{.}50\%$ in a year's time. The bank price its loans using the Ghana Reference Rate as required by Bank

of Ghana and demands $10\%$ compensating balance on all its loans. The bank charges $0\mathrm{.}75\%$ origination fees and

$3\%$ risk premium on all its loans. Also, $100\%$ of the short$-$term loans re$-$price every $3$ months, whilst $60\%$ of the

Long Term consumer loans re$-$price every $6$ months. The LongTerm Commercial loan is $100\%$ fixed whilst the

mortgage re$-$price every month.

On the deposit side, $25\%$ of both the demand and the savings account re$-$price every month. As a new recruits in

the Treasury department, the Treasurer has tasked you to help determine the following:

a$)$ The impact on bank's Net Interest Income over the next lyr if the decline in rates as forecasted tends to

be true.

b$)$ The impact on bank's Capital $($Net worth$)$

c$)$ The expected return on the bank's loan book if ABC's loan loss ratio is $5\%.($dyanll rate$)$

The current $91-$day Treasury Bill is $12\mathrm{.}47\%,$ Monetary Policy Rate is $13\mathrm{.}50\%$ and Interbank Overnight Rate is

$12\mathrm{.}61\%.$ Cash Reserve Requirement is $8\%$ whilst Cash$-$In$-$Vault is $2\%.$