Question No. 1:
a) You are a bank manager and given the responsibility to manage the liquidity risk being faced by the bank. The Balance Sheet of the bank is given below:
Table: Balance sheet of a bank holding no excess reserves
Assets (in Million)
Liabilities (in Million)
Reserves Rs.15 million
Deposits Rs.90 million Rs.100million
Loans Rs.95 million
Borrowed funds Rs.35 million
Securities Rs.35 million
Bank capital Rs.20 million
A customer demands Rs.5 million cash withdrawals from the bank; what changes in the above Balance Sheet will occur if you decide to manage the liquidity risk through:
1. Adjusting assets by:
a. Selling the securities
b. Reducing the loans
2. Adjusting liabilities by:
b. Attracting deposits
Note: You are required to prepare four different Balance Sheets for each of the above mentioned strategies. (10 marks)
b) Discuss why bankers prefer liability management over asset management in order to mitigate liquidity risk? (5 marks)
Question No. 2:
a) You, as a bank manager, are managing the bank’s assets and liabilities in such a way that interest rate the bank has to pay on its liabilities is 4% while interest rate the bank charges on its various assets is 6%. Suppose 30% of the bank’s assets fall into the category of interest-sensitive while others are not sensitive to the changes in interest rate. Similarly, half of the bank’s liabilities are interest-sensitive while rests of the half are not. What will be the impact on the profitability of the bank if the interest rate rises by 1% on all assets and liabilities of the bank? (10 marks)
b) What will be the impact of increase in interest rate on the profitability of the bank if the bank has more interest-sensitive liabilities than interest-sensitive assets? (5 marks)
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I have studied the question and also saw the handsout but the 2nd question is not in my range will any body tell me the method of that question how to solve
yaar koi toh help keru kuch sumj nahe a raha koi idea he dedo
For Question # 1 (a)
Less 5 Million securities on asset side and withdraw 5 million deposit
For Question # 1 (b)
Reduce the loan by 5 Million on asset side
For Question # 1 (a) (Liability Side)
Add borrowed Funds by 5 Million and withdraw 5 million depost
For Question # 1 (b) (Liability Side)
The same balance sheet which is given in question
yeh ata he second question ata he question 2 ka a part ka idea do
If interest rates increase, Some Bank’s gross profits, the difference between what it pays for its liabilities and earns on its assets, will decline because the value of its rate-sensitive liabilities exceeds that of its rate-sensitive assets
this particular bank will suffer a slight decrease in the gross profit
for q1 liability side part b why the same balance sheet is write in the solution.
What will be the impact of increase in interest rate on the profitability of the bank if the bank has
more interest-sensitive liabilities than interest-sensitive assets?
Interest Rate Risk'
The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying (investing in fixed-income securities with different durations) or hedging (e.g. through an interest rate swap).
The possibility of a reduction in the value of a security, especially a bond, resulting from a rise in interest rates. This risk can be reduced by diversifying the durations of the fixed-income investments that are held at a given time.