PART A

The book value of DRAGON SLAYER BANKs balance sheet is listed below. The current market yield for the securities is in parentheses. The amounts are in millions.

Asset		Liability & Equity
Cash	55	Demand deposits	300
6 month T-bills (4.25%)	50	Savings accounts (2.0%)	205
2 year personal fixed rate loan at	100	3 month CD (2.50%)	150
6.50%
3 year T bills (4.85%)	100	9 months CDs (3.85%)	150
3 year 5.5% semi-annual coupon	90	1 year term deposit (4.0%)	520
T-notes (5.25%)
5 year 6.2% semi-annual coupon	100	2 year term deposits (4.30%)	200
T-notes (5.75%)
5 year personal loan (11.5%,	350
repriced yearly)
5 year bond 8.0% annual coupon	150	5-year bonds at 6.75%	250
issued by Spanish government with		semiannual interest, balloon
rating credit rating B		payment
		20-year bonds at 7.5%	250
		interest, balloon payment
10 year commercial loan (12.25%	730
repriced @ 6 months)		Subordinate notes:
15-year commercial loan at 10%	220	3-year fixed rate (5.65%)	230
interest (repriced monthly)
20-year sovereign bonds 12.0%	150	6-year fixed rate (6.00%)	150
annual-coupon issued by
Cambodian government with BB
rating		Ordinary Equity	20
20-year mortgages at 8.5% interest	390	Preference shares	20
(LVR 65%, no mortgage
insurance), balloon payment^		Retained Earnings	40
Total Assets		Total liability and equity
	2485		2485

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Required

What is the cumulative repricing gap if the planning period is

3 month

2 year

(2 + 2 marks)

What will happen to the net interest income of the bank, if interest on the banks rate sensitive assets is forecasted to decrease by 60 basis points and rate-sensitive liabilities to increase 25 basis points in 6 months time?

		(4 marks)
3.	Due to the uncertainty in the economy, based on the banks estimate there is a potential of
	decrease in the demand deposits. What are some of the impact may that have on the
	banks overall asset-liability?	(4 marks)
4.	Does the bank have sufficient liquid capital to cushion any unexpected losses as per the
	Basle III requirement? (ignore cyclical buffer requirement)	(8 marks)

PART B

The following is the balance sheet of a VRY-SMPL Bank. All the items are recorded based on the book value and they were purchased at par value.

Asset		Liability
5 year semi-annual 6.45%pa coupon	250	6 months treasury bills	250
bond
10 year 3.5% annual coupon bond	100	3 year semi annual coupon 5.50% bond	200
10 year treasury bond 7.5 % semi	350	6 year annual coupon (6.30%pa) bond	200
annual coupon
		Equity	50
	700		700

5. Assume current market yield is flat at 6.5% p.a. What is the duration gap of the bank

(6 marks)

Using the duration gap estimated from question 6, what will happen to the net worth of the bank if the market yield goes up by 1.5%p.a.?....................................................... (4 marks)

7. What is the maturity gap of the bank (2 marks)

PART C (8 marks) -- word limit : 500 words

The Basel Banking supervision committee has proposed the Basle III standards.

Compare and discuss the differences between Basle II and the Basle III.

What are some of the requirements (and issues) faced by the financial institutions in trying to meet these new requirements?

(8 marks)

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Some notes:

Question 2 - Read Chapter 5. Or refer tutorial (topic 5) question 16

Questions 2 to 4 - There is no word limit. However if you know the key issues, you should be able to explain your answer within 500 words.

Question 4, To avoid any confusion, please use the following link from APRA for conversion purpose. You mainly only require to refer to Attachment A and Attachment F.

http://www.apra.gov.au/adi/PrudentialFramework/Documents/Basel-III-Prudential-Standard-APS-112-(January-2013).pdf