Question
Your employer has asked you to examine the interest-rate risk of your bank relative to your direct competition. Management is concerned that interest rates will
Your employer has asked you to examine the interest-rate risk of your bank relative to your direct competition. Management is concerned that interest rates will fall by the end of the year and wants to see what would happen to the relative profitability of the firm if the decline actually occurs.
Interest-rate risk depends on each bank's relative position of interest-sensitive assets and liabilities. You begin the analysis by collecting the information and estimates.
1. What is the total for interest-rate-sensitive assets for
a. Your firm?
b. Your competition?
2. If interest rates decline by 3%? Increase by 3%?
3. What is the gap of your firm? your competition?
4. Using the Macaulay concept of duration, calculate the weighted duration of each asset and liability for both your firm and your compeitition
5. What is the average duration for assets for your firm? assets for your competition? liabilities for your firm? liabilities for your competition?
6. What is the duration gap for your firm? your competition?
7. Using the net worth formula, if interest rates decline by 3%, what will be the expected change in market value of net worth for your firm? your competition?
8. Using the net worth formula, if interest rates rise by 3%, what will be the expected change in market value of net worth for your firm? your competition?
9. What would your firm need to do to eliminate the income gap using adjustments to rate-sensitive assets?
10. What would your firm need to do to immunize the market value of net worth from interest rate risk using duration?
Bank Balance Sheet Competition Your Firm Duration Amount Smillions Amount Smillions) ars ars Assets Reserves and cash items Securities 0.0 4 0.0 0.6 1.6 5.0 0.3 1.2 4.0 4 Less than 1 year 1-2 years Greater than 2 years 9 Residential mortgages 0.9 Variable-rate Fixed-rate (30 years) 9 15 0.4 5.5 21 17 Commerical loans 0.6 0.9 1.8 6.0 0.0 Less than 1 year 1-2 years 13 31 Greater than 2 years Physical capital 5.4 0.0 10 25 Liabilities Checkable deposits Money market deposit accounts Savings deposits CDs 1.0 0.6 1.0 14 9 16 1.0 0.5 1.0 12 0.6 0.5 1.8 2.2 0.0 0.4 0.3 Variable-rate Less than 1 year 1-2 years Greater than 2 years 14 10 10 14 2.9 0.0 15 Fed funds Borrowings 0.4 1.2 2.9 18 12 31 0.7 1.8 3.8 12 Less than 1 year 1-2 years Greater than 2 years 39Step by Step Solution
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