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Question 1 [18 marks] Suppose M&T Bank has the following assets and liabilities to manage (shown in Table 2). The current interest rate on the

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Question 1 [18 marks] Suppose M&T Bank has the following assets and liabilities to manage (shown in Table 2). The current interest rate on the rate-sensitive asset and liability is 1% per annum. Assume that 15% of the bonds asset, consumer loans asset and commercial loans asset, 20% of the demand deposits liability and 18% of the saving accounts liability are interest rate sensitive. Table 2. M&T Bank Assets and Liabilities Value ($ Duration million) (in years) 450 4 Consumer Loans 500 Commercial Loans 660 Reserves and cash 300 Asset Bonds 6 8 0 REQUIRED: (a) Calculate the duration gap for M&T Bank. Liability Demand Deposits Saving Accounts Equity Bank Capital Value ($ million) 570 420 920 Duration (in years) 3 2 0 (5 marks) (b) Based on gap analysis, calculate the expected change in income if interest rate decreases by 100 basis points. (3 marks) (c) Critically evaluate the impact of covid-19 on M&T bank's liquidity risk management and discuss potential solutions to these challenges. (10 marks) (Total 18 marks) Question 1 [18 marks] Suppose M&T Bank has the following assets and liabilities to manage (shown in Table 2). The current interest rate on the rate-sensitive asset and liability is 1% per annum. Assume that 15% of the bonds asset, consumer loans asset and commercial loans asset, 20% of the demand deposits liability and 18% of the saving accounts liability are interest rate sensitive. Table 2. M&T Bank Assets and Liabilities Value ($ Duration million) (in years) 450 4 Consumer Loans 500 Commercial Loans 660 Reserves and cash 300 Asset Bonds 6 8 0 REQUIRED: (a) Calculate the duration gap for M&T Bank. Liability Demand Deposits Saving Accounts Equity Bank Capital Value ($ million) 570 420 920 Duration (in years) 3 2 0 (5 marks) (b) Based on gap analysis, calculate the expected change in income if interest rate decreases by 100 basis points. (3 marks) (c) Critically evaluate the impact of covid-19 on M&T bank's liquidity risk management and discuss potential solutions to these challenges. (10 marks) (Total 18 marks)

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