Question

Directions: All calculations involving interest rates should be answered as a percentage to two decimal places, for example 5.42% rather than 0.05.

1.) A bank has $50M in rate-sensitive assets and $35M in rate-sensitive liabilities. What is the impact on the bank’s profits if rates decrease by 50 basis points?

Answer 1

According to the question,

Rate sensitive assets = $ 50M

Rate sensitive liabilities = $ 35M

Calculating the Repricing gap and the impact on profits of the bank when the rate decrease by 50 basis points:-

Repricing Gap = Rate sensitive assets - Rate sensitive liabilities

= $ 50M - $ 35M = +$15M

# [1 basis point is equal to 0.01% hence 50 basis point will be equal to 0.05% or 0.005 ]

Now calculating the change in the Net Interest Income of the bank when the rates decrease by 50 basis points:-

Change in NII =( Repricing Gap) * ( Change in rate )

= ($15M )* ( 0.005 )

= 0.075M

Hence if the rates decrease by 50 basis points, the Net Interest Income will decrease by $ 75000.

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