Question
PART A
The DRAGON SLAYER BANK?s balance sheet is listed below. Market yield are in parentheses.
The amounts are in millions.
Asset Liability & Equity
Cash 15 Demand deposits 125
6 month T-bills (4.25%) 120 Savings accounts (2.0%) 42
3 year T-notes (5.25%) 100 3 months CDs (3.8%) 215
5 year T-notes (5.75%) 220 6 months CDs (3.85%) 180
5 year personal loan (11.5%,
repriced @ yearly)
400 1 year term deposit (4.0%) 460
5 year Kangaroo bond 8.0%
coupon issued by Spanish
government with BB rating
150 2 year term deposits
(4.30%)
150
10-year car loans (11.25%) 260 5-year CDs at 6.75%
interest, balloon payment
250
10 year commercial loan (12.25%
repriced @ 6 months)
530 20-year debentures at 7.5%
interest, balloon payment
200
15-year commercial loan at fixed
10% interest (repriced monthly),
balloon payment
200 Overnight repo (3.4%) 200
20-year Kangaroo sovereign bonds
12.0% coupon issued by
Indonesian government with BBB
rating
150 Subordinate notes:
3-year fixed rate (5.65%) 300
20-year mortgages at 8.5%
interest, balloon payment
320
Equity 160
Preference shares 30
3 year preference shares
5% dividend
70
Equipment 20 Retained Earnings 103
Total Assets 2405 Total liability and equity 2405L B F 3 0 3 B a n k i n g a n d R i s k M a n a g e m e n t A s s i g n m e n t 2 S 1 2 0 1 2 Page 3
1. What is the maturity gap of the bank (2 marks)
2. What is the repricing gap if the planning period is 1 year? 2 year? (2 marks)
3. What is the duration gap of the bank assuming current market yield is flat at 6.5%?
(3 marks)
4. What if current market interest is 5.65%, What is the impact over the next six months on net
interest income if interest on the banks rate sensitive assets decrease by 50 basis points
and rate-sensitive liabilities decreased 25 basis points? (5 marks)
5. Due to the uncertainty in the economy, based on the bank?s estimate there is a potential of
increase in the short term deposits. What are some of the impact will that may have on the
bank?s overall asset-liability? (5 marks)
6. If interest rate is expected to increase by 50 basis points across the yield curve. What will
happen to the equity of the bank? (5 marks)
7. If you are working at the asset liability management division of the bank, propose some of
the strategies you could do to reduce the volatility of the value of equity? (5 marks)
8. Does the bank have sufficient liquid capital to cushion any unexpected losses as per the
Basle II requirement? (5 marks)
PART B (8 marks) — word limit : 800 words
The academic and industrial research has made attempts to forecast or model credit risk over the
last few decades. Use the literature to help your investigation and provide a summary of some of
the models which have been proposed (such as Altman Z-score, . Some good starting points are
such as Altman & Saunders (1998) and Gordy (2000). You are strongly encouraged to do your
own research on the literature.
In process of your review of the literature, do not focus on the methodology or the formula. Just
review the literature section and the conclusion section.
Provide a 1-paragraph conclusion to address one of some of the following issues:
? Short comings of these models
? Impact on small, regional financial institutions
? The financial institution?s ability/strategy to meet the capital adequacy requirements
References
Altman, E (1984) The success of business failure prediction models: An international survey,
Journal of Banking and Finance, 8 (2), pp. 171-198
Altman, E & Saunders, A (1998) Credit Risk Measurement: Developments over the last 20 years,
Journal of Banking and Finance, 21 (11-12), pp. 1721-1742
Gordy, M. (2000) A Comparative Anatomy of Credit Risk Models, Journal of Banking and Finance,
24 (1-2), pp. 119-149
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