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FIN20013 Banking Operations And Governance

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Question:

PART A

The book value of DRAGON SLAYER BANK’s balance sheet is listed below. The current market yield for the securities is in parentheses. The amounts are in millions. 
 

Asset

 

Liability & Equity

 

Cash

55

Demand deposits

300

6 month T-bills (4.25%)

50

Savings accounts (2.0%)

205

2 year personal fixed rate loan at 6.50%

100

3 month CD (2.50%)

150

3 year T bills (4.85%)

100

9 months CDs (3.85%)

150

3 year 5.5% semi-annual coupon

T-notes (5.25%)

90

1 year term deposit (4.0%)

520

5 year 6.2% semi-annual coupon

T-notes (5.75%)

100

2 year term deposits (4.30%)

200

5 year personal loan (11.5%, repriced yearly)

350

 

 

5 year bond 8.0% annual coupon issued by Spanish government with rating credit rating B

150

5-year bonds at 6.75% semiannual interest, balloon payment

250

 

 

20-year bonds at 7.5% interest, balloon payment

250

10 year commercial loan (12.25% repriced @ 6 months)

730

 

 

 

 

Subordinate notes:

 

15-year commercial loan at 10% interest (repriced monthly)

220

3-year fixed rate (5.65%)

230

20-year sovereign bonds 12.0% annual-coupon issued by

Cambodian government with BB rating

150

6-year fixed rate (6.00%)

150

 

 

Ordinary Equity

20

20-year mortgages at 8.5% interest (LVR 65%, no mortgage insurance), balloon payment^

390

Preference shares

20

 

 

Retained Earnings

40

Total Assets

2485

Total liability and equity

2485

Required

1. What is the cumulative repricing gap if the planning period is
  • 3 month
  • 2 year
2. What will happen to the net interest income of the bank, if interest on the banks rate sensitive assets is forecasted to decrease by 60 basis points and rate-sensitive liabilities to increase 25 basis points in 6 months’ time?
 
3. Due to the uncertainty in the economy, based on the bank’s estimate there is a potential of decrease in the demand deposits. What are some of the impact may that have on the bank’s overall asset-liability? 
 
4. Does the bank have sufficient liquid capital to cushion any unexpected losses as per the Basle III requirement? (ignore cyclical buffer requirement)

PART B

The following is the balance sheet of a VRY-SMPL Bank. All the items are recorded based on the

book value and they were purchased at par value.  

Asset

Liability

5 year semi-annual 6.45%pa coupon bond

250

6 months treasury bills

250

10 year 3.5% annual coupon bond

100

3 year semi annual coupon 5.50% bond

200

10 year treasury bond 7.5 % semi annual coupon

350

6 year annual coupon (6.30%pa) bond

200

 

 

Equity

50

 

700

 

700

5. Assume current market yield is flat at 6.5% p.a. What is the duration gap of the bank 

6. Using the duration gap estimated from question 6, what will happen to the net worth of the bank if the market yield goes up by 5%p.a.?

7. What is the maturity gap of the bank 

PART C 

The Basel Banking supervision committee has proposed the Basle III standards.

  • Compare and discuss the differences between Basle II and the Basle
  • What are some of the requirements (and issues) faced by the financial institutions in trying to meet these new requirements?

Some notes:

  • Question 2 - Read Chapter 5. Or refer tutorial (topic 5) question 16
  • Questions 2 to 4 - There is no word limit. However if you know the key issues, you should be able to explain your answer within 500
  • Question 4, To avoid any confusion, please use the following link from APRA for conversion purpose. You mainly only require to refer to Attachment A and Attachment 

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