Question

A bank has the following asset and liability portfolios. Assets Liabilities and Capital Firm (in billion $) Industry Firm (in billion $) Industry Required reserves 3 4% Demand deposits 25 15% Commercial loans NOW accounts 8 10% Floating-rate 30 20% MMDAs 17 20% Fixed-rate 20 11% CDs Total 50 31% Short-term 5 35% Consumer loans 10 20% From 1 to 5 years 30 10% Mortgages Total 35 45% Floating-rate 10 7% Long-term bonds 5 3% Fixed-rate 5 3% Capital 10 7% Total 15 10% Treasury securities Short-term 2 7% Long-term 3 8% Total 5 15% Long term Corporate securities High-rated 0 5% Medium-rated 10 5% Total 10 10% Long-term municipal securities High-rated 0 3% Moderate-rated 0 2% Total 0 5% Fixed assets 7 5% Total Assets 100 100% Total liabilities and capital 100 100% a)Calculate the bank’s interest rate gap and gap ratio. Based on the numbers, what interest rate risk does the bank face? How can the bank reduce its interest rate risk? b)Evaluate the bank’s liquidity, capital adequacy, asset quality based on the balance sheet. For any type of bank risk that appears to be higher than the industry, explain how the balance sheet could be restructured to reduce the risk.

Answer 1

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