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A commercial bank calculates that the duration of its liabilities (excluding net worth) averages one year...

A commercial bank calculates that the duration of its liabilities (excluding net worth) averages one year while the duration of its assets averages 5 years. Assume that this bank has USD100mn of assets and USD25mn of capital. Also assume that assets and liabilities (excluding net worth) are interest rate sensitive and enter the balance sheet at market value (marked to market). If interest rates rose by 200bp what would be the impact on this bank’s leverage ratio?

  • A. falls to 20% exactly
  • B. rises to 27% exactly
  • C. falls to just over 18%
  • D. rises to just over 26%
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