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.

Question:

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

A.) Your firm?

B.) 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

Solution:

"Interest rate sensitive Assets " are the assets that are sensitive to change in the interest rates . Primarily it includes the instruments like Adjustable rate mortgages, instruments that are tied to the benchmark rates like 6-month T-Bill rate ,The LIBOR & the prime rate.

In the Above table , the interest sensitive asset is "Variable rate Residential Mortgage".

a. So The total interest rate sensitive assets for your firm is $ 9 millions

b. The total interest rate sensitive assets for your competition is $ 21 millions

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