Question

1. Consider a bank with the following data:

• Interest sensitive assets = $250 million
• Interest sensitive liabilities = $300 million

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

Answer 1

Given ,

Interest sensitive assets = $250 million

Interest sensitive liabilities = $300 million

A) Interest Sensitive Gap = Interest Sensitive Assets – Interest Sensitive Liabilities.

Therefore, IS -GAP = 250-300

= -$50 Million

Relative IS-GAP ratio = Gap in $/Total Assets

= -50/250 = - 0.2

Interest Sensitivity ratio = RSA in $/$RSL in $.

= 250/300 =0.833

B) As per the IS-GAP (-50 million) the bank is having a negative GAP,A negative gap occurs when a bank's interest rate sensitive liabilities exceed its interest rate sensitive assets.The bank is liablility sensitive .It meanas that when the interest rate rises it adversly affects the banks profit.

C) As the bank is having a negative IS-GAP , if interest rates increase, liabilities would be repriced at higher rates, and income would decrease.That is, the Net Intesrest Margin(NIM) would also reduce.

D) Many describe gap analysis as a method of asset-liability management(ALM), which can be helpful in assessing liquidity risk.Here they are not concerned about the amrket rates rather they are more focussed on the liquidity of the assets and liablities ,so as to reduce the risk.