ProBanker Exercise 4 GAP ANALYSIS This assignment will measure GAP, defined as the difference between risk-sensitive assets (RSA) and risk-sensitive liabilities (RSL). Formerly, GAP = RSA – RSL and...


ProBanker Exercise 4

GAP ANALYSIS


This assignment will measure GAP, defined as the difference between risk-sensitive assets (RSA) and risk-sensitive liabilities (RSL). Formerly, GAP = RSA – RSL and GAP ratio = RSA/RSL. It is a measure of a bank’s exposure to interest rate shocks on current earnings, usually measured for six months and one year. Two Autosims will be created, 4A and 4B.


Assignment 4A




  1. Create a personal Autosim.






    1. Click on Games.




    2. Click on New Autosim game.




    3. Select Assignments Regional Bank template in using template.

      Note: Make sure NOT to choose Sample Regional Bank template.




    4. Type a name in New game’s name. Example “John Roger’s Assignment 4A”




    5. Click on Create Game









  1. Input decisions to your new Autosim. There are five categories of decisions – ‘Bank Treasury, Asset-other, Asset-loans, Liabilities-deposits and Bank-general.’








  1. Click on Autosim games.




  2. Select your newly created Autosim.




  3. Click on Play bank.




  4. Remember to click Save before you go to next category.







  1. Bank Treasury – change the following:







    1. Federal Funds Purchased (not Sold)= $50,000




    2. 90-Day CDs to Issue= $25,000




    3. 180-Day CDs to Issue= $25,000




    4. 360-Days CDs to Issue= $50,000




    5. The remaining boxes should all be zeroes.







  1. Assets-other – change the following:






  1. Planned required reserves= $25,000




  2. New Bonds to Purchase= $15,000




  3. New provision for loan losses = $500








  1. Make no changes to Assets-loans, Liabilities-deposits, and Bank-general.








  1. Simulate next period (on left side of the screen under Game). After a few seconds, you will notice a flicker and it should say End of Period 1. You are ready to review the results.




  2. Fill in the cells in the attached GAP Analysis (Assignment 4A) sheet from Reports or from the Excel file ‘Download full reports.’































































































































































































































GAP Analysis (Assignment 4A)



Federal Funds Sold





Federal Funds Purchased





Fixed Rate Corporate Loans





Demand Deposit





T+1





Retail





Floating Rate Corporate Loans





Corporate





T+1





Negotiable CDs, maturing





T+2





T+1





Installment Loans, maturing





T+2





T+1





T+3





T+2





T+4





T+3





Retail Saving deposits





T+4





Retail CD, maturing





Mortgages, maturing





T+1





T+1





T+2





T+2





Long-Term Retail Deposits





T+3





T+1





T+4





T+2





T+5





T+3





T+6





T+4





T+7





T+5





T+8





T+6





Bonds, maturing start of





T+7





T+1





T+8





T+2





Discount Window Advances





T+3









T+4









T+5









T+6









T+7









T+8









Total Risk-Sensitive Assets (RSAs) T+2





Total Risk-Sensitive Assets (RSAs) T+4





Total Risk-Sensitive Liabilities (RSLs) T+2





Total Risk-Sensitive Liabilities (RSLs) T+4





GAP T+2





GAP T+4





RSA/RSL T+2





RSA/RSL T+4





GAP/Assets T+2





GAP/Assets T+4















Answer the following questions:




  1. Estimate the two-quarter and four-quarter risk-sensitive assets (RSAs), risk-sensitive liabilities (RSLs), and the GAPs (in dollars). Unless otherwise instructed, do not include federal funds sold or discount window advances in your estimation under the assumption it is a one-time event However, include federal funds purchased under the assumption that the bank is a net buyer of funds.




  2. If average interest rates increase by 2% in two quarters, what is the impact on net interest income (ΔNII)? If interest rates decrease by 2%?




  3. If average interest rates increase by 2% in four quarters, what is the impact on net interest income (ΔNII)? If interest rates decrease by 2%?




  4. Estimate the GAP ratio (RSA/RSL) and the GAP/Assets ratio (in percent) for both time buckets.




  5. If interest rates are expected to decrease in the near future, should it increase or decrease its GAP?




Assignment 4B


We will redo Assignment 4A to demonstrate ways for banks to lower the GAP. Assume we expect interest rates to fall in the near future. To reduce GAP, change the following:




  1. Borrow $120 million in 90-day negotiable CDs (instead of $25 million in 90-day, $25 million in 180-day and $50 million in 360-day negotiable CDs as in 4A).




  2. Sell all existing government bonds from T+2 to T+8 and replace them by purchasing $120 million of 8-quarter bonds (instead of purchasing $15,000 in government bonds as in 4A).




Create a new Autosim and name it Assignment 4B.

Input the following decisions.




  1. Bank Treasury – change the following:





    1. Federal Funds Purchased (not Sold)= $50,000




    2. 90-Days CDs to Issue= $100,000




    3. The remaining boxes should all be zeroes.









  1. Assets-other – change the following:






  1. Planned required reserves= $25,000




  2. New Bonds to Purchase= $120,000




  3. Bonds to sell, T+2, T+3, …T+8=$15,000 (cells T+2 to T+8)




  4. New provision for loan losses = $500








  1. Make no changes to Assets-loans, Liabilities – deposits, and Bank – general.








  1. Simulate next period (on left side of the screen under Game). After a few seconds, you will notice a flicker and it should say End of Period 1. You are ready to review the results.




Fill in the cells in the attached GAP Analysis (Assignment 4B) sheet from Reports or from the Excel file ‘Download full reports






























































































































































































































GAP Analysis (Assignment 4B)



Federal Funds Sold





Federal Funds Purchased





Fixed Rate Corporate Loans





Demand Deposit





T+1





Retail





Floating Rate Corporate Loans





Corporate





T+1





Negotiable CDs, maturing





T+2





T+1





Installment Loans, maturing





T+2





T+1





T+3





T+2





T+4





T+3





Retail Saving deposits





T+4





Retail CD, maturing





Mortgages, maturing





T+1





T+1





T+2





T+2





Long-Term Retail Deposits





T+3





T+1





T+4





T+2





T+5





T+3





T+6





T+4





T+7





T+5





T+8





T+6





Bonds, maturing start of





T+7





T+1





T+8





T+2





Discount Window Advances





T+3









T+4









T+5









T+6









T+7









T+8









Total Risk-Sensitive Assets (RSAs) T+2





Total Risk-Sensitive Assets (RSAs) T+4





Total Risk-Sensitive Liabilities (RSLs) T+2





Total Risk-Sensitive Liabilities (RSLs) T+4





GAP Maturity (CGAP) T+2





GAP Maturity (CGAP) T+4





RSA/RSL T+2





RSA/RSL T+4





GAP/Assets T+2





Gap/Assets T+4















Answer the following questions:






  1. Estimate the two-quarter and four-quarter risk-sensitive assets (RSAs), risk-sensitive liabilities (RSLs), and the GAPs. Unless otherwise instructed, do not include federal funds sold or discount window advances in your estimation under the assumption it is a one-time event However, include federal funds purchased under the assumption that the bank is a net buyer of funds.




  2. If average interest rates increase by 2% within the time bucket of two quarters, what is the impact on net interest income (ΔNII)?




  3. If average interest rates increase by 2% within the time bucket of four quarters, what is the impact on net interest income (ΔNII)?




  4. Estimate the GAP ratio (RSA/RSL) and the GAP/Assets ratio (in percent).




  5. Explain the differences in the two-quarter and four-quarter GAPs of Assignments 4A and 4B.





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Mar 31, 2021
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