What is disintermediation

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Week 7

1. Suppose that you are the manager of a bank whose $100 billion of assets have an average duration of four years and whose $90 billion of liabilities have an average duration of six years. Conduct a duration analysis for the bank, and show what will happen to the net worth of the bank if interest rates rise by five percentage points. What actions could you take to reduce the bank's interest-rate risk?

2. Suppose that you are the manager of a bank that has $15 million of fixed-rate assets, $30 million of rate-sensitive assets, $25 million of fixed-rate liabilities, and $20 million of rate-sensitive liabilities. Conduct a gap analysis for the bank, and show what will happen to bank profits if interest rates rise by five percentage points. What actions could you take to reduce the bank's interest rate risk?

3. What is disintermediation? When is disintermediation likely to occur? What factors can reduce it? If I take my funds out of my credit union and put them in a money market mutual fund, have I disintermediated? Why or why not?

4. Describe how each of the following factors contributes to financial innovation: advances in technology, changes in regulation, increased competition, increased price volatility.

Reference no: EM131022248

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