Question

1. What is the cumulative repricing gap if the planning period is? 

2. What will happen to the net interest income of the bank, if interest on the banks rate sensitive assets is forecasted to decrease by 60 basis points and rate-sensitive liabilities to increase 25 basis points in 6 months’ time?

3. Due to the uncertainty in the economy, based on the bank’s estimate there is a potential of decrease in the demand deposits. What are some of the impact may that have on the bank’s overall asset-liability? 

4. Does the bank have sufficient liquid capital to cushion any unexpected losses as per the Basle III requirement? (Ignore cyclical buffer requirement)?

Part II

The following is the balance sheet of a VRY-SMPL Bank. All the items are recorded based on the book value and they were purchased at so value,

5. Assume current market yield is flat at 6.5% p.a. What is the duration gap of the bank?

6. Using the duration gap estimated from question 6, what will happen to the net worth of the bank if the market yield goes up by 1.5%p.a.? 

7. What is the maturity gap of the bank? 

8. What are some of the requirements (and issues) faced by the financial institutions in trying to meet these new requirements?

 

PART III

The Basel Banking supervision committee has proposed the Basle III standards.

• Compare and discuss the differences between Basle II and the Basle III.

Answer 1

Part 1

1. What is the cumulative repricing gap if the planning period is?

            

(a) 3 month

Repricing gap using a 3-month planning period = 

($0 - $150) = -$150 million.

(b) 2 year

Reprising gap using a 2-year planning period 

            Asset               Liabilities                  Gap                 Cum. Gap

                                    150 (3 month)             150                  -150

50 (6month)     0            50         -100

                        0 150(9 month)          150             -100

                        0           520 (1year)            520                  -620

            100 (2 year)     200                         100                  -720     

 

The Gap cum is 100 twice because the value of an asset is less than liabilities, the total value of the asset is 700 and liabilities has also same after including the value of equity. But the Cum-Gap is calculated after as per requirement in which equity is not added. The Cum-Gap is the total amount of asset and liabilities after calculation of 3 months and 2 years of duration. The main reason is the value of the asset which is lesser than liabilities and due to this reason the Gap Cum is 100 twice.

2. What will happen to the net interest income of the bank, if interest on the banks rate sensitive assets is forecasted to decrease by 60 basis points and rate-sensitive liabilities to increase 25 basis points in 6 months’ time?

 

= CGAP(ɅR) = -$100m. (.0025) = -$0.25m.

 

= CGAP(ɅR) = -$100m. (-.0060) = $0.60m.

The increase of base point is 25 and the time period is 6 months'. We found that the 25 base point earn –0.25m and in another hand the decrease base pint is 60 in which the net income is calculating 0.60m. In this question, the first and second steps were explained according to the requirement which is decrease 60 and increase 25 points respectively.

3. Due to the uncertainty in the economy, based on the bank’s estimate there is a potential of decrease in the demand deposits. What are some of the impact may that have on the bank’s overall asset-liability? 

            Due to a potential of the decrease in the demand of deposited the bank faced a difficult to build again, the main reason is the increase of bank liabilities in decreases of an asset. The bank faced high-interest rate issues from clients and also less deposited because the customer demand is safety and easily withdraw of money and this situation is not favorable for them. The bank faced difficulty because of losing the interest of its customer. The economy also becoming low and due to that reason no new investor wants to take more risk for investing in the bank. The equity of bank is not much more than 50m and the amount of liability is very high which is 650m. This is the main reason which impacted the overall asset and liabilities of the bank. 

 

4. Does the bank have sufficient liquid capital to cushion any unexpected losses as per the Basle III requirement? (Ignore cyclical buffer requirement)

The bank doesn't have a much more liquid capital to save itself. The retained earnings are only $40 Million and the number of shares are also very low. The bank is not in a position to issue more share for capital, but the bank has some asset which helped for recovery of any unexpected losses. According to Basle III, it is very difficult for the bank to recover any unexpected losses. The investment of bank become low because of this Basle III strategies. This Basle III increase the percentage of the total capital ratio which is 11.50% but the previous Ratio is not more than 6%. 

The leverage ratio is also increased from NON to 3%. The minimum equity ratio also increases 4% to 6 and 7.5%. The minimum liquidation ratio is also not defined in Basle III, due to this the bank is not going to face or fulfill the unexpected losses of a company/ Bank. The Total asset is very less than liabilities. The company is facing many unexpected losses and these cannot be filled until the bank has not much more money to reduce it. 

The basic purpose of this paper is to explain the main difference and cause of Basel III. In Basle III the capital ratio is calculated by using the risk-weighted asset and regulatory asset. The total capital asset is not more than 8% and the tier 2 limit is 100% of tier 1 capital. There is a following deduction which will consist of following terms,

Goodwill age a deduction from Tier 1 capital

• When the capital equity is increased it will have caused securitization exposure
• There are many subsidiaries engaged in the investment in banks and other financial activities which are not considered in a national system. 

This procedure is focused on the safety of bank and other individual institutions.

 

Part II

The following is the balance sheet of a VRY-SMPL Bank. All the items are recorded based on the book value and they were purchased at so value,

 

5. Assume current market yield is flat at 6.5% p.a. What is the duration gap of the bank?

Total Asset – Equity / Total Asset * Rate

700 – 50 / 700 * 6.5%

                                                                        0.06035

 

6. Using the duration gap estimated from question 6, what will happen to the net worth of the bank if the market yield goes up by 1.5%p.a.? 

            The net worth of the bank is only equity capital which is 50 if we applied the market yield rate which is 1.5% p. a then we found the following values,

50 × 1.5%

0.75

 

7. What is the maturity gap of the bank? 

Maturity Gap = MA - ML

MA      = 5(250) + 10(100) + 10(350) / 700

            =8.21

ML      = ½ (250) + 3(200) + 6(200) / 700

            = 2.75

 

Maturity Gap = MA - ML

= 8.21 – 2.75

= 5.46  

PART III

The Basel Banking supervision committee has proposed the Basle III standards.

• Compare and discuss the differences between Basle II and the Basle III.

            The banking supervision committee approved the Basle III which has a more valuable than Basle II, the detail of both Basle II and three are given below in following points tables,

Particulars	Basle II	Basle III
The total capital Ratio for both Basle are	8%	11.50%
Tier I Capital is	4.00%	6.00%
Leverage Ratio	None	3 %
Minimum liquid ratio	None	TBD
Minimum Net Stable Ratio	None	TBD (2018)
Core Tier I	2.00%	5.00%
The Minimum ratio of Common Equity is	2.00%	4.50% to 7.00%

These are all the main points which explain the main difference between Basle III and Basle II.

 

• What are some of the requirements (and issues) faced by the financial institutions in trying to meet these new requirements?

 

The main aim of Basle is to improve the performance of a bank. It defines the operating risk, bank-sovereign, internal and external events. The objective of the BCBS is to gain a better understanding of the challenges faced by modern banking system in terms of risk and its risk management and to frame supervisory and regulatory standards and guidelines to help the banking system diminish these risks and function properly,

• There are many members of a BCBS, which are Australia, Argentina, Hong Kong, Germany, Saudi Arabia, U.K, Spain, South Africa, Japan, Korea, Turkey, Switzerland, Netherland, France, China, Canada, and Brazil. 
• The chairman of BCBS is Stefan Ingves, who is also the center bank of Sweden. 

           The Basle three was introduced to fulfill the requirement of global economy. The global economy faced crises from previous few year and due to this the Basle III make and implemented. The BCBS wants to reach an agreement on reforms which provide a strength to the national as well as global economy. There are many requirements faced by Basle III for the implementation of this new strategy on the financial institution. The main problem was the investment and company previous police because this Basle has much more changes than the previous one so that the organization faced an interest rate, capital and earnings ratio and interest problems.

The economy showed progress day by day after the implementation of Basle III. The Basle III has a more and complex than other, the main purpose of this Basle III is to boost the economy. Leverage and the capital ratio are much more than the Basle III. The leverage ratio is 2% but in Basle II it is none. The capital ratio in Basle II is 4% and the Basle III is 6% which showed that the use or adoption of Basle III makes much more change in company sale and income as well as for the economy. The capital ratio is also much more than Basle II, in II the capital ratio is 8% and Basle III has 11.50%.

 

                                             

The following are the main difference between Basle II and Basle III, the main difference is the supervising and regulatory control so that the Basle III is better than the previous Basle II. The main important Basle III and II elements are given below,

• Capital and its stricter standards
• Capital conservation buffer
• Counter-cyclical buffer

These are the main difference between Basle III and Basle II.

 

These are the main difference between Basle III and Basle II.