Question

Assume Bank One has the following balance sheet items in millions of dollars: Rate sensitive Asset $20m Rate sensitive Liabilities $50m Fixed Rate Assets $80m Fixed Rate Liablities $40m Capital $10m Also assume the duration of the assets is 2 years and that of its liabilities is 3 years. Assume that interest rates are initially 3%.

1.- What is the income gap for the bank?

2.- If the bank sells $10M of its fixed rate assets and replaces them with rate sensitive assets. What is the income gap for the bank?

Answer 1

1). Solution :- Calculation of income gap :-

Income Gap = Rate sensitive asset - Rate sensitive liabilities.

= $ 20 Million - $ 50 Million

= (-) $ 30 Million.

Conclusion :- Income gap for bank = (-) 30 Million dollars.

2). Solution :-

Revised rate sensitive assets = Old rate sensitive assets + Fixed rate asset now the part of rate sensitive assets.

Revised rate sensitive assets = 20 Million + 10 Million

= 30 Million.

Accordingly, Income gap = $ 30 Million - $ 50 Million

= (-) 20 Million.

Conclusion :- Income gap for bank (in question 2) = (-) 20 Million dollars.