Business 171B Chapter 7 Managing Interest Rate Risk: GAP and Earnings Sensitivity Flashcards

1
Q

A bank with a negative GAP is said to be ____.

A

Liability Sensitive

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2
Q

A bank with a positive GAP is said to be _____.

A

Asset Sensitive

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3
Q

In Market Risk, what is the “S” in CAMELS

A

Sensitivity to market risk

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4
Q

What are RSLs and RSAs?

A
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5
Q

What is Interest rate risk?

A

The measure of exposure of a bank’s financial health against potential adverse movements in interest rates.

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6
Q

How does interest rate risk impact a bank?

A

1) Impact on current earnings (GAP)

2) impact on the economic value of the bank (EVE)

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7
Q

1) What it the formula for GAP?

2) What is the formula for GAP ratio?

A

1) $RSA - $RSL

2) $RSA / $RSL

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8
Q

If rates are expected to go UP, is it better to be Asset Sensitive or Liability
Sensitive?

A

Asset Sensitive

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9
Q

If rates are expected to go DOWN, is it better to be Asset Sensitive or
Liability Sensitive?

A

Liability Sensitive

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10
Q

When market interest rates fall, what happens to assets?

A

They become RSAs

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11
Q

When market interest rates rise, what happens to liabilities?

A

They become RSLs, deposits become volatile.

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12
Q

When does EVE grow?

A
  1. When rates go up and DGAP is > 0

2. When rates to down and DGAP is < 0

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13
Q

What are ways to become more Asset Sensitive?

A
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14
Q

What are ways to become more Liability Sensitive?

A
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15
Q

How do you reduce asset sensitivity?

A

1) Buy long term securities
2) Lengthen maturity of loans
3) Move from floating rate to term loans
4) Put floors on loan rates

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16
Q

How do you increase asset sensitivity?

A

1) Buy short-term securities
2) Shorten loan maturities
3) Make more loans on a floating rate basis

17
Q

How do you reduce liability sensitivity?

A

1) Pay premiums to attract longer term deposits
2) Issue long term subordinated debt
3) Put caps on deposit rates

18
Q

How do you increase liability sensitivity?

A

1) Pay premiums to attract short term deposits

2) Borrow more via noncore purchased liabilities

19
Q

What is the relationship between Risk and Return?

A
20
Q

What is Maturity Risk?

A
21
Q

What is an Interest Rate Spread?

A
22
Q

What is the Maturity Risk Premium?

A
23
Q

What is The Yield Curve?

A