Basic Gap Analysis technique is the technique used for assets liability management used to assess interest rate/liquidity risk. Under this technique, interest rate sensitive liabilities are reduced from the corresponding interest rate sensitive assets to get the gap. This gap is multiplied by the percent change in interest rate to get an approximate change in the net interest income of the entity. A negative gap discloses that liabilities exceed assets and an increase in the market interest rate would result in a decline in the net interest income of the entity and vice versa. | ||||
1. Calculation of the Bank's Gap, using the basic gap analysis. | ||||
Bank's Gap = Rate Sensitive Assets minus Rate Sensitive Liabilities | ||||
Bank's Gap = $ 30 million - $ 50 million * | ||||
Bank's Gap = $ 20 million RSL>RSA | ||||
*Working: | ||||
Rate Sensitive Assets: | ||||
Particulars | Amount ($ in millions) | |||
Variable Rate Loans | $5 | |||
Short Term Loans | $10 | |||
Short Term Securities | $15 | |||
Rate Sensitive Assets | $30 | |||
Rate Sensitive Liabilities: | ||||
Particulars | Amount ($ in millions) | |||
Variable Rate CDs | $30 | |||
Money Market Deposits Accounts | $20 | |||
Rate Sensitive Liabilities | $50 | |||
2. Change in Bank's Profit, on an increase in interest rates by 2% points. | ||||
Change in Bank Profits = Bank's Gap * Change in Interest Rate | ||||
Change in Bank Profits = $ 20 million * 2% | ||||
Change in Bank Profits = $ 4 million | ||||
Since there was a negative gap, i.e. liabilities exceeded assets by $ 20 million, therefore the increase in the interest rate would result in a decline in the net interest income of the entity by $ 4 million. | ||||
3. Change in Bank's Profit, on a decrease in interest rates by 3% points. | ||||
Change in Bank Profits = Bank's Gap * Change in Interest Rate | ||||
Change in Bank Profits = $ 20 million * 3% | ||||
Change in Bank Profits = $ 6 million | ||||
Since there was a negative gap, i.e. liabilities exceeded assets by $ 20 million, therefore the decrease in the interest rate would result in an increase in the net interest income of the entity by $ 6 million. | ||||
Rate-Sensitive Bank Assets Liabilities $5 Variable-rate Loans Short-term Loans Short-term Securities Reserves Variable-rate CDs Money Market...
Assets: $200 Reserves; $5000 Short term Bonds; $6000 Long Term Loans Liabilities: $7000 Checkable Deposits; $3000 Fixed Rate Borrowings; $1200 Capital If market interest rates fall by 2%, how will bank profits change?
Assets: $200 Reserves; $5000 Short term Bonds; $6000 Long Term Loans Liabilities: $7000 Checkable Deposits; $3000 Fixed Rate Borrowings; $1200 Capital What is the Gap for this bank and what does it measure? What (be specific) could the bank do to create a gap of zero?
(6 points) 3. The bank you own has the following balance sheet Liabilities with current interest rate Assets with current interest rate $5million $20 million Variable: 1% Checking Fixed: 0% Reserves deposits Savings Deposits $25 million Fixed: 2% $10 million Variable: 2% Government Securities Variable: 3 % $10 million Money Market Deposit Accounts $35 million Fixed: 6% Mortgage Loans Bank Capital To be To be $10 million Variable: 7% Short-Term determined determined Loans Business $20 million Fixed: 9% Loans $80...
The balance sheet for ACME Bank is shown below. ACME Bank Balance Sheet 1 Assets Liabilities and net worth Reserves $ 107,500 Checkable $ 120,000 deposits Loans $ 28,500 Stock shares $ 290,000 Property $ 274,000 Suppose the bank decides to invest 40 percent of its excess reserves in short-term securities in order to earn interest. The bank issues a cashier's check to a securities dealer to purchase the securities. The securities dealer deposits the check into an account at...
The balance sheet for ACME Bank is shown below. ACME Bank Balance Sheet 1 Assets Liabilities and net worth Checkable deposits $ Reserves 69,500 97,000 $ 42,500 Stock shares $ Loans 220,000 $ 205,000 Property Suppose the bank decides to invest 80 percent of its excess reserves in short-term securities in order to earn interest. The bank issues a cashier's check to a securities dealer to purchase the securities. The securities dealer deposits the check into an account at a...
The balance sheet for ACME Bank is shown below.ACME Bank Balance Sheet 1 Reserves - $64,000Loans - $50,000Property - $299,000Checkable Deposits - $108,000Stock Shares - $305,000Suppose the bank decides to invest 40 percent of its excess reserves in short-term securities in order to earn interest. The bank issues a cashier's check to a securities dealer to purchase the securities. The securities dealer deposits the check into an account at a different bank. What will ACME Bank's balance sheet look like after the...
An FI's balance sheet is characterized by short-term fixed-rate assets funded by long-term variable-rate securities. Most likely the bank has a positive repricing gap and a positive duration gap. O positive repricing gap and a negative duration gap. negative repricing gap and a positive duration gap. negative repricing gap and a negative duration gap. None of the options are correct.
A bank could reduce asset sensitivity if gap is positive by: A) decreasing its long-term securities as a percentage of total assets B) shortening the average maturity of its loans C) replacing variable rate loans with fixed rate loans D) all of the above E) none of the above
Market Value Market Value Duration (Years) Assets Rate Rate Liabilities Duration and (Years) Equity Time Deposits 2.50 CDs 5.00 Equity 4% 6% 1.25 3.00 Cash Loans T-Bonds Total $ $ $ $ 150 675 175 1,000 10% 5% $ $ $ 500 400 100 1,000 Use the following bank information for questions a) – e). a) What is the weighted average duration of assets? b) What is the bank's duration gap? c) What is the bank's weighted average cost of...
4.4. Gotbucks Bank, Inc. (in $millions) Assets Liabilities and Equity $ 41 Core deposits Cash Federal funds Loans (floating) 31 Federal funds 61 116 Euro CDs Loans (fixed) 76 Equity 17 Total assets S 264 Total liabilities and equity S 264 Notes to the balance sheet: Currently, the fed funds rate is 9.6 percent. Variable-rate loans are priced at 2 percent over LIBOR (currently at 10 percent). Fixed-rate loans are selling at par and have five-year maturities with 11 percent...