What happens to Badlands Bank (balance sheet below) if interest rates increase by 100 basis points? Assume a rate sensitivity of 40% for relevant asset items, and of 90% for relevant liability items. That is, the 100 bps interest rate change will not translate into 100 bps rate changes on asset and liability items.

What can Badlands Bank do to navigate this situation?

Assets Cash Securities - Trading Securities Investment Loans - variable rate Loans fixed rate Non-earning assets Amount Rate $75 0% $50 5% $150 5% $400 7% $200 8% $125 Liabilities Interbank market 1 day Demand deposits Long-term debt fixed Amount $50 $600 $225 Rate 3.5% 3% 4.5% Equity $125 Total $1,000 $1,000