Question

8. Study the following Balance Sheet. Based on its structure, what is the potential liability to the bank if interest rates decrease 1% during a 1-year period? Bank “A” Balance Sheet (in $1,000,000s) Assets Liabilities Cash & Cash Equivalents $ 5.00 Demand Deposits $ 508.00 Loans: Fixed-Rate Passbook Accounts $ 978.00 <6-month $ 23.00 3-Mo Comm'l Paper $ 2.70 6-12 months $ 22.00 Time Deposits: 1-year $ 134.00 1-year $ 2,335.50 2-years $ 142.00 2-year $ 1,226.80 >15-years $ 5,567.00 3-5 year $ 928.40 Loans: Variable-Rate 30-bonds $ 1,705.60 10-year variable $ 345.00 Equity $ 920.00 30-year variable $ 2,367.00 OBS Liabilities TOTAL: $ 8,605.00 $ 8,605.00

a. No risk to the Bank, it has no repricing gap.

b. No risk to the Bank, it has a negative repricing gap.

c. The bank is exposed to about -$30 million for every 1% increase in interest rates, so the bank has negative repricing gap.

d. The bank is exposed to $30 million for every 1% in interest rates, so the bank has positive repricing gap.

e. None of the above.

Answer 1

In the given question, Bank will face negative repricing gap which in turn will increase the profitability of the bank. The statement mentioned in option (C) to the given question is very correct answer.

Option C: The bank is exposed to about -$30 million for every 1% increase in interest rates, so the bank has negative repricing gap.

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