Your employer has asked you to examine the interest-rate risk of your bank relat

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 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.

To prepare your presentation for the bank officers, you anticipate and answer the following questions:

What is the total for interest-rate-sensitive assets for:

Your firm?

Your competition?

What is the total for interest-rate-sensitive liabilities for:

Your firm?

Your competition?

Bank Balance Sheet Competition Your Firm Amount Smillions Duration ears Amount Smillions Duration ears 4 0.0 0.0 Reserves and cash items Securities 0.6 1.6 5.0 0.3 1.2 4.0 4 Less than 1 year 1-2 years Greater than 2 years 0.9 4.4 Residential mortgages Variable-rate Fixed-rate (30 years) 0.4 5.5 17 30 30 0.6 1.4 5.4 0.0 Commerical loans 0.9 1.8 6.0 0.0 Less than 1 year 1-2 years 13 31 Greater than 2 years Physical capital 25 10 Liabilities Checkable deposits Money market deposit accounts Savings deposits CDs 1.0 0.5 1.0 14 10 12 6 1.0 0.6 1.0 16 0.4 0.3 1.1 2.9 0.0 12 14 10 10 14 0.6 0.5 1.8 2.2 0.0 Variable-rate Less than 1 year 19 1-2 years Greater than 2 years 15 10 12 39 Fed funds Less than 1 year 1-2 years Greater than 2 years 0.4 1.2 2.9 18 12 31 0.7 1.8 3.8

Explanation / Answer

Interest Rate sensitive assets for Your Firm = 9+13+31+55+4 = $112 million

Interest Rate sensitive assets for Your Competition =5+21+30+22+30 = $99 million

Interest Rate sensitive Liabilities for Your Firm =

Interest Rate sensitive Liabilities for Your Competition =

14+16+12+18+12+31

=$103 million

10+6+12+9+39 = $76 million

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