Question

31. Discuss the relationship between the Gap and the change in net interest income when interest rates decreased. Why did Net Interest Margin increase or decrease?

Answer 1

a discuss the relationship eship between GAP and champe in net interest income when interest rates decreased. Why did nen Maryin increase on decrease ? recreased. Why did Net interest A GAP is a static measure a risk that is commonly associated with net interest income margin) targeting GAP considers the impact of changine rates on the bones o the banks net interest income and changing rates on the market blue g equity. Net interest income reffects me difference between the revenue generated from a banks interest bearing assets ated with passing on its interest bearing liali ches The relation between hap and change in interest income when interest raks decreased are as follows. changes in neet interest income are directly proponhonal to the site of the hap i mere is a parallel shift in the greld curve ANII exp a GAP X Alexp. with me decrease in interest rates net interest income will decrease. If interest rates fills asset will gain, mare value than liatiner, this increasing the value. of the timelyben Consider an example. Why did het interent margin increase or decrease Lost 4.01 6.01. Expected Balance sheet for Hypothetical Bank Assets Yield Lialinites Rate Sensitive $ 500 8.0.1 & 600 Fixed Rate 11.0. + 220 Non Earning $ 100 $ 920 Equily 9 80 Total $ 1000 $1000 $350 $ 150 Net interest income 2 Net internos Marsha (0.08x suo to 11x350) - (0.04 x 600+ 06 x ore, 78.50 -37 W 41.30 41.30/850 4.86.1. 50 - 600 - 100 AD

Examine the impact of the falowing changes. Situation & Stuhin2 A A 1.l. increase in the level of all shart term roter? 1. decrease in the spread behween asset yield and Interest cost such that the rate on RSA increase 8.5t. and RSL increase to s.st. solution In Situation 1. 1.1. mcrease in short term rotes is slated stated with a Negative GAP, more liabilities than Asach Repnice higher the Net interest income and Net interest Margin fall, 1.1. Fcrease in short term rates. Expected Balance sheet for - Asch. Yield. Rate Sensitive & 500 9.04 Fixed Rate $ 350 11.01. Non earning $ 150 Hypothetical Bank.. liabilinen Cost $ 600 5.0d. $ 220 6.01. $ 100 $ 920 $.so & luoo Ernity Total slovo 222) Net interest income. 2 (0.09 X Suut 0.110 350-10.05x600t oory 2 83.50 - 43.20 2 40.30 Net interest margin 2 40.30/8.50 2 4.74 1. GAP 2 suo 600 z-100.

Situation 2. 11. decrease in the spread. Cest. 5.5.1 6.04 1 Silistin? Expected Balance sheet for Hypothetical Bank. Asseh trels. Liabiner. Rate Sensitive & suo 8.51. Fixed Rake $ 350 11.01. $ 220 Non earning. $ 130 $ 100 $ 920 Equity $ 8.0 Total. 1000$ $ lovo Net interest Income (0.085&suot will x350) -10.05s rouot 0.06x220) 281- 46.20 2 34.80 Net Interest margin 34.80/850 24.09.1. GAP 2500-600 2-100 Solution sindton 2. Therefore Net antitest Interest Income and Net nterest margin exime full (rise) with a decrease increase) in the smead. Conclusion with a positive GAP, the interent margin would increase if short term rates rose and decrease and shart term rater fell with a nepatre GAP, me interest margin would decline is short term rates rose and increase if short term rates fell..