VRY-SMPL Bank and Dragon Slayer – Banking Operations and Government Online Tutoring

Question 1:

Cumulative Re-Pricing for 6-months and 3-years:

• 6 Months Cumulative Re-Pricing = Rate Sensitive Assets – Rate Sensitivity Liabilities = $1240 – $355 = $885 mn

• 3 Years Cumulative Re-Pricing = Rate Sensitive Assets – Rate Sensitivity Liabilities = $1430 – $1475 = ($45) mn

Question 2:

Before Change:

Note that decrease by 30 basis points means -0.003 or -0.3% and increase by 50 basis points means +0.005 or 0.5%. First we will calculate the interest income of Dragon Slayer without increase/decrease in interest for 12 months’ time.

Hence, interest income before change for 1 year was = $135.1 – $21.325 = $113.775

After Change:

Hence, interest income before change for 1 year was = $131.38 – $24.85 = $106.53

The interest income has decreased from $113.775 to $106.53 due to change in the interests of the rate sensitive assets by 0.3% and rate sensitive liabilities by 0.5%.

Question 3:

Dragon Slayer Bank has to meet the certain capital resources under Basel III requirement (Taskinsoy, 2018). It is required to maintain the common equity tier 1 ratio of 4.5% and minimum leverage ratio (calculated by dividing Tier 1 capital with bank’s total consolidated assets). Under Basel III, the banks are also required to hold leverage ratio in excess of 3%. In order to have the cushion against losses, the banks have to maintain the following (Hlatshwayo & Petersen, 2013);

• Positive working capital
• Declining debts
• Equity more than the debts
• High current ratio
• Positive net cash flows
• Maintained level of reserves with Fed
• Contingency accounts for covering losses

In order to stay stable, Dragon Slayer is expected to have adequate liquid capital so that it can cover the unexpected losses and reduce its debt obligations. For finding the liquidity coverage ratio, the High Quality Liquidity Assets must be divided by the Expected Net Cash Outflows that could occur in next 30 days. For Dragon Slayer, it is given as;

All of the weights are taken from Source: (International Monetary Fund, 2016).

So, the liquidity capital is = $845/$305 = 2.770 or 277% as per (Hlatshwayo & Petersen, 2013)

Hence, the Dragon Slayer Bank has enough liquidity capital as cushion

VRY-SMPL BANK

Question 1:

Duration Gap of VRY-SMPL BANK

ASSETS

Hence, the weighted average duration of Assets on basis of above calculations for VRY-SMPL Bank is as follows;

The market value of assets is calculated as:

LIABILITIES

Hence, the weighted average duration of Liabilities on basis of above calculations for VRY-SMPL Bank is as follows;

The market values of liabilities are

The duration gap is calculated as follows;

DGAP = Duration of Assets – [(MV of Liabilities/ MV of Assets) x Duration of Liabilities]

DGAP = 45.464 – [(500/680) x 32.043]

DGAP = 45.464 – 23.561 = 21.903 years

Question 2:

As we can see that the MV of assets is currently higher at $680 than the MV of liabilities at 500. If the market yield will go up by 2.5% per annum, then the revised market yield will be 5.5%. The net worth of the bank will then be calculated as;

% Change        = – Duration Gap x (Change in i/1+i)

                        = -21.903 x (0.025/1+0.03)

                        = -21.903 x 0.0243

                        = -0.5316 or -53.16%

Hence, with assets of $680, the fall of $361.51 in the net worth of bank is expected.

Question 3:

The maturity gap of bank is calculated by taking the difference between the weighted average maturities of the assets and the weighted average maturities of the liabilities. It is given as;

Maturity of Assets = [200 (2) + 150 (6) + 350 (15)]/700 = 6550/700 = 9.357

Maturity of Liabilities = [300 (10) + 200 (12)]/500 = 5400/500 = 10.8

Maturity Gap = 9.357 – 10.8 = -1.425

References

Hlatshwayo, L. N. P. & Petersen, M. A., 2013. Basel III Liquidity Risk Measures and Bank Failure. Discrete Dynamics in Nature and Society , pp. 1-19.

International Monetary Fund, 2016. Seminar for Senior Bank Supervisors from Emerging Economies. [Online] Available at: http://pubdocs.worldbank.org/en/335731477065135563/5-Implementation-of-Basel-III-Liquidity-Requirements-in-Emerging-Markets.pdf
[Accessed 27 October 2020].

Taskinsoy, J., 2018. Effects of Basel III Higher Capital and Liquidity Requirements on Banking Sectors across the Main South East Asian Nations. SSRN Electronic Journal, 9(4), p. 214.