Question

NatWest like virtually all financial institutions has as a key focus, asset and liability management. They wish to ensure that there is an adequate spread between return on assets and the cost of funds, liabilities. They are also concerned with the interest rate sensitivity of assets and liabilities as well as their respective liquidity. A key asset for NatWest is in the form of 30-year mortgages with floating interest rates that adjust on an annual basis. NatWest obtains most of its funds by issuing 5-year Certificates of Deposit. It uses the Yield Curve to assess the market’s anticipation of future interest rates. It believes that expectations of future interest rates are the main driver of affecting the Yield Curve. Assume that the Yield Curve is steeply downward sloping. Based upon the information provided and your understanding of what drives their business model, please answer the following questions:

a. Why is it important to assess the sensitivity of assets and liabilities in a financial institution such as NatWest?

Answer 1

Answer a)

Financial institution plays role of intermediary between the client and the fund takers, such institutions acknowledge stores for which they are committed to pay premium (liabilities) and offer advances for which they get premium (asset). Notwithstanding advances, protections portfolios make bank resources. Banks must oversee loan fee chance, which can prompt a confound of advantages and liabilities. Unstable loan costs and the abrogation of Regulation, which topped the rate at which banks could pay contributors, added to this issue.

Asset and Liability Management (ALM) is the act of overseeing money related risk that emerge because of jumbles between the all type of assets and liabilities as a component of a venture technique in budgetary bookkeeping. It is centered around a long haul point of view as opposed to relieving impending dangers and is a procedure of amplifying advantages for meet complex liabilities that may expand gain.

ALM incorporates the distribution and the executives of benefits, value, loan cost and credit hazard the board including hazard overlays, and the adjustment of far reaching instruments inside these hazard systems for advancement and the board in the neighborhood administrative and capital condition

The major objective of such sensitivity analysis are

• Any GAP between asset and liability may create a huge financial trap for such financial institutions.
• Management of liquidity
• Currency risk management:
• Management of capital and funding need
• Profit planning and forecast