Part B
This presentation is the property of its rightful owner.
Sponsored Links
1 / 32

Part B Covers pages 201-205 PowerPoint PPT Presentation


  • 52 Views
  • Uploaded on
  • Presentation posted in: General

Part B Covers pages 201-205. Repricing Gap Example. Assets Liabilities Gap Cum. Gap 1-day $ 20 $ 30 $-10 $-10 >1day-3mos. 30 40 -10 -20 >3mos.-6mos. 70 85 -15 -35

Download Presentation

Part B Covers pages 201-205

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Part b covers pages 201 205

Part B

Covers pages 201-205


Repricing gap example

Repricing Gap Example

AssetsLiabilitiesGapCum. Gap

1-day $ 20 $ 30 $-10 $-10

>1day-3mos. 30 40 -10 -20

>3mos.-6mos. 70 85 -15 -35

>6mos.-12mos. 90 70 +20 -15

>1yr.-5yrs. 40 30 +10 -5

>5 years 10 5 +5 0


Applying the repricing model

Applying the Repricing Model

  • Example II:

    If we consider the cumulative 1-year gap,

    DNII = (CGAPone year) DR = (-$15 million)(.01)

    = -$150,000.


Equal rate changes on rsas rsls

Equal Rate Changes on RSAs, RSLs

  • Example: Suppose rates rise 1% for RSAs and RSLs. Expected annual change in NII,

    NII = CGAP ×  R

    = -$15 million × .01

    = -$150,000

  • With positive CGAP, rates and NII move in the same direction.

  • Change proportional to CGAP


Unequal changes in rates

Unequal Changes in Rates

  • If changes in rates on RSAs and RSLs are not equal, the spread changes. In this case,

    NII = (RSA ×  RRSA ) - (RSL ×  RRSL )


Repricing gap example1

Repricing Gap Example

AssetsLiabilitiesGapCum. Gap

1-day $ 20 $ 30 $-10 $-10

>1day-3mos. 30 40 -10 -20

>3mos.-6mos. 70 85 -15 -35

>6mos.-12mos. 90 70 +20 -15

210225

>1yr.-5yrs. 40 30 +10 -5

>5 years 10 5 +5 0


Unequal rate change example

Unequal Rate Change Example

  • Spread effect example:

    RSA rate rises by 1.0% and RSL rate rises by 1.0%

    NII =  interest revenue -  interest expense

    = ($210 million × 1.0%) - ($225 million × 1.0%)

    = $2,100,000 -$2,250,000 = -$150,000


Unequal rate change example1

Unequal Rate Change Example

Spread effect example:

RSA rate rises by 1.2% and RSL rate rises by 1.0%

NII =  interest revenue -  interest expense

= ($210 million × 1.2%) - ($225 million × 1.0%)

= $2,520,000 -$2,250,000 = $270,000


Unequal rate change example2

Unequal Rate Change Example

Spread effect example:

RSA rate rises by 1.0% and RSL rate rises by 1.2%

NII =  interest revenue -  interest expense

= ($210 million × 1.0%) - ($225 million × 1.2%)

= $2,100,000 -$2,700,000 = -$600,000


Repricing model 1 year cum gap analysis

Repricing Model – 1 Year Cum Gap Analysis


Repricing model 1 year cum gap analysis1

Repricing Model – 1 Year Cum Gap Analysis


Difficult balance sheet items

Difficult Balance Sheet Items

  • Equity/Common Stock O/S

    • Ignore for repricing model, duration/maturity = 0

  • Demand Deposits

    • Treat as 30% repricing over 5 years/duration = 5 years 70% repricing immediately/duration = 0

  • Passbook Accounts

    • Treat as 20% repricing over 5 years/duration = 5 years 80% repricing immediately/duration = 0

  • Amortizing Loans

    • We will bucket at final maturity, but really should be spread out in buckets as principal is repaid. Not a problem for duration/market value methods


Difficult balance sheet items1

Difficult Balance Sheet Items

  • Prime-based loans

  • Adjustable rate mortgages

    • Put in based on adjustment date

    • Repricing/maturity/duration models cannot cope with life-time cap

  • Assets with options

    • Repricing model cannot cope

    • Duration model does not account for option

    • Only market value approaches have the capability to deal with options

    • Mortgages are most important class

    • Callable corporate bonds also


Prime rate vs fed funds 1955 2009

Prime Rate Vs Fed Funds 1955-2009


Prime rate vs fed funds 1997 2009

Prime Rate Vs Fed Funds 1997-2009


Prime rate vs fed funds 2007 2009

Prime Rate Vs Fed Funds 2007-2009


Repricing model 1 year cum gap analysis2

Repricing Model – 1 Year Cum Gap Analysis


Repricing model 1 year cum gap analysis3

Repricing Model – 1 Year Cum Gap Analysis


Repricing model 1 year cum gap analysis4

Repricing Model – 1 Year Cum Gap Analysis


Repricing model 1 year cum gap analysis5

Repricing Model – 1 Year Cum Gap Analysis


Repricing model 1 year cum gap analysis6

Repricing Model – 1 Year Cum Gap Analysis


Comparison of 1980 bank vs s l

Comparison of 1980 Bank vs S&L


Comparison of 1980 bank vs s l1

Comparison of 1980 Bank vs S&L


Restructuring assets liabilities

Restructuring Assets & Liabilities

  • The FI can restructure its assets and liabilities, on or off the balance sheet, to benefit from projected interest rate changes.

    • Positive gap: increase in rates increases NII

    • Negative gap: decrease in rates increases NII

  • The “simple bank” we looked at does not appear to be subject to much interest rate risk.

  • Let’s try restructuring for the “Simple S&L”


Weaknesses of repricing model

Weaknesses of Repricing Model

  • Weaknesses:

    • Ignores market value effects and off-balance sheet (OBS) cash flows

    • Overaggregative

      • Distribution of assets & liabilities within individual buckets is not considered. Mismatches within buckets can be substantial.

    • Ignores effects of runoffs

      • Bank continuously originates and retires consumer and mortgage loans and demand deposits/passbook account balances can vary. Runoffs may be rate-sensitive.


A word about spreads

A Word About Spreads

  • Text example: Prime-based loans versus CD rates

  • What about libor-based loans versus CD rates?

  • What about CMT-based loans versus CD rates

  • What about each loan type above versus wholesale funding costs?

  • This is why the industry spreads all items to Treasury or LIBOR


The maturity model

*The Maturity Model

  • Explicitly incorporates market value effects.

  • For fixed-income assets and liabilities:

    • Rise (fall) in interest rates leads to fall (rise) in market price.

    • The longer the maturity, the greater the effect of interest rate changes on market price.

    • Fall in value of longer-term securities increases at diminishing rate for given increase in interest rates.


Maturity of portfolio

Maturity of Portfolio*

  • Maturity of portfolio of assets (liabilities) equals weighted average of maturities of individual components of the portfolio.

  • Principles stated on previous slide apply to portfolio as well as to individual assets or liabilities.

  • Typically, maturity gap, MA - ML > 0 for most banks and thrifts.


Effects of interest rate changes

*Effects of Interest Rate Changes

  • Size of the gap determines the size of interest rate change that would drive net worth to zero.

  • Immunization and effect of setting

    MA - ML = 0.


Maturities and interest rate exposure

*Maturities and Interest Rate Exposure

  • If MA - ML = 0, is the FI immunized?

    • Extreme example: Suppose liabilities consist of 1-year zero coupon bond with face value $100. Assets consist of 1-year loan, which pays back $99.99 shortly after origination, and 1¢ at the end of the year. Both have maturities of 1 year.

    • Not immunized, although maturity gap equals zero.

    • Reason: Differences in duration**

      **(See Chapter 9)


Maturity model

*Maturity Model

  • Leverage also affects ability to eliminate interest rate risk using maturity model

    • Example:

      Assets: $100 million in one-year 10-percent bonds, funded with $90 million in one-year 10-percent deposits (and equity)

      Maturity gap is zero but exposure to interest rate risk is not zero.


Modified maturity model

Modified Maturity Model

Correct for leverage

to immunize, change:

MA - ML = 0 to

MA – ML& E = 0 with ME = 0

(not in text)


  • Login