Bank Management

Module: ASB3525 – Bank Management
Organiser: Dr Edward Thomas Jones (Office – 1.02 Hen Goleg, E-mail – e.t.jones@bangor.ac.uk)
N.B.
Please submit an electronic copy of your answers ONLY via Turnitin. Put your student ID number
followed by your name as the file name of the electronic copy uploaded to TurnItIn.
Please ensure you mark clearly which question you are answering. You should attempt to answer
every question and clearly show your calculations. The contribution of each Part towards the overall
assignment mark is given below.
The maximum word limit is 1,500 words.
THIS ASSIGNMENT IS DUE BY 5PM ON FRIDAY 17TH APRIL 2020
ASSIGNMENT 2019/20
Part A (worth 15% of the overall assignment mark)
Table 1 presents the balance sheet of Bank A.
TABLE 1 – BALANCE SHEET OF BANK A (ALL VALUES IN £ MM)
Assets Rates Liabilities Rates
Rate sensitive 400 5% 600 1%
Fixed rate 450 7% 200 2%
Non-earning/paying 150 100
Sub-total 900
Equity 100
Total 1,000 1,000
i. Calculate the net interest income, net interest margin, and GAP of Bank A.
ii. Assume that there is a parallel shift in rates by +2% (i.e. +200bps). Explain the expected
impact of this parallel shift on net interest income and net interest margin given the GAP
calculated in part (A.i)?
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iii. Calculate the new net interest income and net interest margin given a +1% (i.e. 100 bps)
parallel shifts in rates.
Part B (worth 35% of the overall assignment mark)
Table 2 presents the balance sheet of Bank B.
TABLE 2 – BALANCE SHEET OF BANK B (ALL VALUES IN £ MM)
Assets Market value Rates
Cash 100
3-years commercial loan 750 10%
6-years treasury bond 150 6%
Total Assets 1,000
Liabilities and Equity
1-year time deposit 500 4%
3-years bond 400 8%
Equity 100
Total Liabilities and Equity 1,000
i. Calculate the weighted average duration of assets, the weighted average duration of
liabilities, net interest income, net interest margin, and the DGAP of Bank B. (Hint: you will
need to calculate the duration for each product first).
ii. Assume that there is a parallel shift in rates by +1% (i.e. +100bps). Explain the expected
impact of this parallel shift on net interest income and net interest margin given the DGAP
calculated in part (B.i)?
iii. Calculate the new net interest income and net interest margin given a +1% (i.e. 100 bps)
parallel shifts in rates.
Part C (worth 50% of the overall assignment mark)
i. Explain what Bank B can do to immunise its portfolio (i.e. what changes should be made to
the balance sheet described in Table B so that DGAP is approximately equal to zero).
ii. Based on your explanation in C.i, calculate the new net interest income and net interest
margin based on this strategy to immunise the portfolio of Bank B. Explain the impact of
this immunisation strategy on net interest income and net interest margin.
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Suggested literature to aid your discussion (you should also find additional literature to support
your answers).
 Chaudron, R. (2018). Bank’s interest rate risk and profitability in a prolonged environment
of low interest rates. Journal of Banking and Finance. 89, 94-104.
 Frame, S. and White, L. (2005). Fussing and fuming over Fannie and Freddie; How much
smoke, how much fire? Journal of Economic Perspective. 19, 159-184.
 Gerlach, J., Mora, N. and Uysal, P. (2018). Bank funding costs in a rising interest rate
environment. Journal of Banking and Finance. 87, 164-186.
 Oberoi, J. (2018). Interest rate risk management and the mix of fixed and floating rate
debt. Journal of Banking and Finance. 86, 70-86.
 Timothy, G. (2004). Managing interest rate risk in a rising rate environment. RMA Journal,
Risk Management Association (RMA), November 2004