Question

11. If interest rates are falling, and Interest Sensitive Liabilities are greater than Interest Sensitive Assets, is this favorable or unfavorable to the bank? (2) Why? (3) 12. When dealing with Structure of Funds Management, what are the three (3) Types of Deposits that Banks have to manage? Name them, and briefly describe each. (6) a) b) c) 13. What is Securitization? (2) 14. Name two (2) reasons why Banks use Securitizations? (4) 15. What is CDARS (2)? What is its benefit (2)? How does it work (2)

Answer 1

11.

Interest sensitive assets and liability as those that are affected by the changes in the interest rates.

If the interest rates declines interest sensitive assets , the banks earns less profit on the assets they have loaned to the customers .and so the consumers has to pay less interest, they would have more disposable income.

Interest sensitive liabilities are the sort term deposits that banks have from its customers comprising of money market securities, savings accounts, etc. they are upon variable interest rates that keeps on changing.

If the interest rates decline, then the banks would have to pay less interest on these to the customer, creating a profitable scenario for the banks, that is favorable for the banks

Now, if interest rates are falling and the interest rates liability are more than interest sensitive assets, it would be a favorable situation for banks. Because then , the decline in amount of interest paid by the bank will be more than the decline of interest rates received by the banks. So there will be net profit for the banks.