You have just graduated from The UWI with a Masters' Degree in Enterprise Risk Management and you were successful in your application for the position of Bank Manager of First National Bank. The bank's balance sheet is shown below and balances are in millions, (interest rates and duration are in parentheses). The duration of the assets is 4.00776 years and the duration of the liabilities is 1.605753 years. Interest rates are forecasted to fall by forty (40) basis points in the upcoming twelve (12) months, however you have the discretion to adjust rates on the balance sheet plus or minus five (5) basis points relative to the forecast without jeopardizing your competitiveness in the commercial banking sector. In response to this forecast, your board at your last meeting, suggested that you should decrease interest rates on your rate sensitive assets in keeping with the forecast and decrease rates on your rate sensitive liabilities by thirty (30) basis points. Write a detailed report assessing the potential impact on the bank's bottom line if you were to make the adjustments as suggested by your board. Include in your report any alternative strategy that you would recommend (if any), to ensure the optimal impact on your bottom line. The assessment \& /or alternative strategy (if applicable) MUST have supporting calculations and explanations of the influence of the spread effect and the CGAP effect. (15 Marks) You have just graduated from The UWI with a Masters' Degree in Enterprise Risk Management and you were successful in your application for the position of Bank Manager of First National Bank. The bank's balance sheet is shown below and balances are in millions, (interest rates and duration are in parentheses). The duration of the assets is 4.00776 years and the duration of the liabilities is 1.605753 years. Interest rates are forecasted to fall by forty (40) basis points in the upcoming twelve (12) months, however you have the discretion to adjust rates on the balance sheet plus or minus five (5) basis points relative to the forecast without jeopardizing your competitiveness in the commercial banking sector. In response to this forecast, your board at your last meeting, suggested that you should decrease interest rates on your rate sensitive assets in keeping with the forecast and decrease rates on your rate sensitive liabilities by thirty (30) basis points. Write a detailed report assessing the potential impact on the bank's bottom line if you were to make the adjustments as suggested by your board. Include in your report any alternative strategy that you would recommend (if any), to ensure the optimal impact on your bottom line. The assessment \& /or alternative strategy (if applicable) MUST have supporting calculations and explanations of the influence of the spread effect and the CGAP effect. (15 Marks)
