What is capital adequacy management

Reference no: EM133205154

Assignment:

Section 1: Discussion Questions - ANSWERS MUST BE TYPED

1. Discuss what is traditional banking and how "borrowing short and lending long" makes a bank susceptible to Bank Runs. Explain your answer.

2. To manage liquidity, in the case of a liquidity shortfall, a bank can increase liquidity in 4 different ways. Write out the 4.

3. Briefly state the 3 ways that banks can protect themselves or fight against "credit risk".

4. What is capital adequacy management, why is it important (what is the cost vs. benefit having too much capital or not enough). Discuss.

5. Briefly discuss what is securitization, and then discuss the costs vs. benefits of securitization. (to answer this question, it is best to first read the article on Securitization Posted under week 11).

Section 2: Numerical Problem (calculations do NOT need to be typed).

6. Suppose that you know the following about a bank:

Total assets = $150mil
Liabilities = $125mil
Bank capital=$25mil

Average duration of assets is 3 years while average duration of liabilities is 4 years.

The banks has $75 million in rate sensitive assets and $50 million in rate sensitive liabilities

Use Duration Analysis to show how exposed the bank is to interest rate risk by assuming that the interest rate rises by 1%. Make sure to show all work (all calculations) and to interpret your results.

7. Continue with question 6: use the Gap Analysis to show how exposed the bank is to interest rate risk [again consider a rise in interest rate by 1%]. Show all work/calculations and interpret your results.

Reference no: EM133205154

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