Topic 5 - Asset-Liability Management Flashcards
RSA > RSL
ARBL
RSL > RSA
LRBA
ROE =
ROE = Net Income/Equity
ROA =
ROA = Net Income/Assets
EM =
EM = A/E = ROE/ROA
Net Interest Income =
NII = Interest Income - Interest Revenue
Net Income =
NI = NII - Taxes (in this tutorial)
Net Income Margin =
NIM = Net Income/Total Assets
Repricing Gap =
RSA - RSL
Prepayment Risk
(Under falling interest rate) If loans are paid early or refinanced, bank loses potential interest income
Quantity Effect
(Under falling interest rate) If banks cannot replace lost loans, it’s balance sheet will shrink
Price Effect
(Under falling interest rate) If bank can replace lost loans, it will be at a lower yield
Adverse Price Effect
(Under rising interest rates) Old loans worth less
Favourable Price Effect
(Under falling interest rates) Old loans worth mor
Adverse Reinvestment Effect
(Under falling interest rates) New loans worth less
Favourable Reinvestment Effect
(Under rising interest rates) New loans return more
LRBA Bank
- Vulnerable to rate increase
- Negative maturity gap (RSA-RSL)
- Positive duration gap (Da-k*Dl)
ARBL Bank
- Vulnerable to rate decrease
- Positive maturity gap (RSA-RSL)
- Negative duration gap (Da-k*Dl)
ΔNII =
ΔNII = Δr (GAP) = Δr (RSA - RSL)
CGAP
Cumulative Gap: one year repricing gap = RSA - RSL
Gap Ratio =
Gap Ratio = CGAP/Total Assets
Measures direction and scale of interest rate risk exposure
Duration =
D = [ Σt t (CFt / (1+i )t) ] / [ Σt (CFt / (1+i )t )]
1
OR
D= Σ(t*PV of CF)/Σ(PV of CF)
ΔP =
ΔP = -D[ΔR/(1+R)]P = -(MD) × (ΔR) × (P)
Immunization
Matching asset and liability duration
Leverage =
Leverage = k = L/A
ΔE
ΔE= - [DA-DL k] × A × [ΔR/(1+R)]
A = Size of FI
