Use the balance sheet for San Diego Bank in Exhibit A and the industry norms in Exhibit B to answer the following questions.

a. Estimate the gap and the gap ratio and determine how San Diego Bank would be affected by an increase in interest rates over time. b. Assess San Diegos credit risk. Does it appear high or

low relative to the industry? Would San Diego Bank per- form better or worse than other banks during a recession?

c. For any type of bank risk that appears to be higher than the industry, explain how the banks balance sheet could be restructured to reduce this risk.

(Answer these questions on a paper)

$800 2,500 6,000 9,000 500 400 800 Exhibit A Balance Sheet for San Diego Bank (in Millions of Dollars) ASSETS LIABILITIES AND CAPITAL Required reserves $800 Demand deposits Commercial loans NOW accounts Floating-rate None MMDAs Fixed-rate 7,000 CDs Total 7,000 Short-term 9,000 Consumer loans 5,000 From 1 to 5 years None Mortgages Total Floating-rate None Federal funds Fixed-rate 2,000 Long-term bonds Total 2,000 CAPITAL Treasury securities Short-term None Long-term 1,000 Total 1,000 Long-term corporate securities High-rated None Moderate-rated 2,000 Total Long-term municipal securities High-rated None Moderate-rated 1,700 Total 1,200 Fixed assets 500 TOTAL ASSETS $20,000 TOTAL LIABILITIES and CAPITAL 2,000 $20,000 Exhibit B industry Norms in Percentage Terms 4% 17% 10 20 20 11 31 20 LIABILITIES AND CAPITAL Demand deposits NOW accounts MMDAS CDs Short-term From 1 to 5 years Total Long-term bonds CAPITAL 35 10 45 2 7 8 3 10 ASSETS Required reserves Commercial loans Floating-rate Fixed-rate Total Consumer loans Mortgages Floating-rate Fixed-rate Total Treasury securities Short-term Long-term Total Long-term corporate securities High-rated Moderate-rated Total Long-term municipal securities High-rated Moderate-rated Total Fixed assets TOTAL ASSETS 7 8 15 5 5 10 3 2 5 5 100% TOTAL LIABILITIES and CAPITAL 100%