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The following is the structure of Balance Sheet of Dempsey Bank Ltd: Assets Value ($m) Variable-rate Mortgages 60 Fixed-rate Mortgages 75 Fixed-rate Commercial Loans 90

The following is the structure of Balance Sheet of Dempsey Bank Ltd:

Assets

Value ($m)

Variable-rate Mortgages

60

Fixed-rate Mortgages

75

Fixed-rate Commercial Loans

90

Variable-rate Commercial Loans

60

Properties

15

Total Assets

300

Liabilities

Value ($m)

Money Market Deposits (<1 year)

15

Savings Deposits

60

Variable rate Certificate of Deposits (<1 year)

90

Equity

135

Total Liabilities

300

Using the following assumptions on the runoff cash flows.

  1. 1) Fixed-rate mortgages repaid during the year is 20%;

  2. 2) Variable-rate commercial loans repaid during the year is 30%;

  3. 3) Proportion of savings deposits that are rate-sensitive is 25%.

Required: a) Perform a basic gap analysis on risk sensitive assets and liabilities.

  1. b) What will be the net interest income at the year-end if interest rate increases by 1 percent, from 8 percent to 9 percent per annum?

    1. 1) What happens to the income, if the Bank decides to convert $45 m of its existing fixed-rate mortgages into variable-rate mortgages?

    2. 2) What happens to the income, if the Bank revises the estimate of the percentage of the saving deposits that are rate-sensitive from 25% to 15%?

  2. c) If a CEO of Dempsey Bank Ltd was quite certain that interest rates were going to rise within the next six months, how should the bank manager adjust the banks six-month repricing gap to take advantage of this anticipated rise? What if the manager believed rates would fall in the next six months.

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