Question

1-) Consider a bank with the following data:
•   Interest sensitive assets = $250 million
•   Interest sensitive liabilities = $300 million

a.   Calculate the IS-GAP, Relative IS-GAP and IS Ratio of the firm (3 points)
b.   Comment on whether the bank has a positive or negative gap and is asset or liability sensitive. Why? (2 points)
c.   What happens to the net interest margin (NIM) of this bank when interest rates increase? (5 points)
d.   If the ALM team intentionally take this position, what do you think their expectations are concerning the market rates? Explain explicitly. (5 points)

Answer 1

a. IS GAP = Interest sensitive liabilities - Interest sensitive assets

= ($ 300 - $ 250) million = $ 50 million

Relative IS-GAP = IS-GAP / Total assets

= 50/250 = 0.2

The interest-sensitivity ratio is just the ratio of interest-sensitive assets to interest sensitive liabilities.

IS Ratio = 250/300 = 5/6 = 0.83333

b. Since,  Interest Sensitive Asset < Interest Sensitive Liabilities, the bank is Liability Sensitive and IS Gap is negative.

c. If interest rates increase, the bank´s net interest margin will reduce since cost of the liabilities will increase more than the rise in value of assets.

d. If the ALM team intentionally took this position, they expect that the market rates will come down / decrease in the near term, so then the cost of the liabilities will reduce more than the fall in value of assets, thereby increasing NIM and profitability of the bank.