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.

1. What is the total for interest-rate-sensitive assets for

Your firm?

Your competition?

2. 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

(1)Interest rate sensitives are those that are those that have a duration greater than zero and are variable interest rates

These are all securities, variable rate husing mortgages and commercial loans.

For your firm these are : 4+3+7 (securities) + 9 (Variable rate house mortgage) + 13+31+55 (Commercial loans) = 122 Million.

For your competitor: 5 + 7 +9+21+30+22+30 = 124 Million

(2) Interest rate sensitive liabilties are all expect Fed funds:

For you: 10+5+12+6+19+8+15+12+9+39 = 135 Million

For your competitor:14+9+16+12+14+10+10+18+12+31 = 146 Million

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