The following is the structure of the Balance Sheet of Dempsey Bank Ltd: Using the following assumptions
Question:
The following is the structure of the Balance Sheet of Dempsey Bank Ltd:
Using the following assumptions on the runoff cash flows.
1) Fixed-rate mortgages repaid during the year is 20%;
2) Variable-rate commercial loans repaid during the year is 30%;
3) Proportion of savings deposits that are rate-sensitive is 25%.
Required:
a) Perform a basic gap analysis on risk-sensitive assets and liabilities.
b) What will be the net interest income at the year-end if the interest rate increases by 1 percent, from 8 percent to 9 percent per annum?
1) What happens to the income if the Bank decides to convert $45 m of its existing fixed-rate mortgages into variable-rate mortgages?
2) What happens to the income if the Bank revises the estimate of the percentage of the saving deposits that are rate-sensitive from 25% to 15%?
c) If a CEO of Dempsey Bank Ltd was quite certain that interest rates were going to rise within the next six months, how should the bank manager adjust the bank’s six-month repricing gap to take advantage of this anticipated rise? What if the manager believed rates would fall in the next six months.
Financial Institutions Management A Risk Management Approach
ISBN: 978-0071051590
8th edition
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders