Business 171B Chapter 7 Managing Interest Rate Risk: GAP and Earnings Sensitivity Flashcards
A bank with a negative GAP is said to be ____.
Liability Sensitive
A bank with a positive GAP is said to be _____.
Asset Sensitive
In Market Risk, what is the “S” in CAMELS
Sensitivity to market risk
What are RSLs and RSAs?
What is Interest rate risk?
The measure of exposure of a bank’s financial health against potential adverse movements in interest rates.
How does interest rate risk impact a bank?
1) Impact on current earnings (GAP)
2) impact on the economic value of the bank (EVE)
1) What it the formula for GAP?
2) What is the formula for GAP ratio?
1) $RSA - $RSL
2) $RSA / $RSL
If rates are expected to go UP, is it better to be Asset Sensitive or Liability
Sensitive?
Asset Sensitive
If rates are expected to go DOWN, is it better to be Asset Sensitive or
Liability Sensitive?
Liability Sensitive
When market interest rates fall, what happens to assets?
They become RSAs
When market interest rates rise, what happens to liabilities?
They become RSLs, deposits become volatile.
When does EVE grow?
- When rates go up and DGAP is > 0
2. When rates to down and DGAP is < 0
What are ways to become more Asset Sensitive?
What are ways to become more Liability Sensitive?
How do you reduce asset sensitivity?
1) Buy long term securities
2) Lengthen maturity of loans
3) Move from floating rate to term loans
4) Put floors on loan rates