QUESTION 1.
Part I.
A bank has the following information.
Its rate-sensitive assets equal £900 million.
Its rate-sensitive liabilities equals £700 million.
Assume a parallel shift in the yield curve.
Present the relevant formulas and calculate:
a) The bank’s GAP.
[3 marks]
b) The expected change in net interest income if rates increase by 1 percentage point?
[3 marks]
c) The expected change in net interest income if rates decrease by 2 percentage point?
[3 marks]
d) Assume that this bank has a negative duration GAP. Explain the implications of duration GAP in this case and provide some possible transactions/strategies (at least two) to reduce interest rate risk.
[11 marks]
Part II.
a) Present and discuss the five Cs of credit in relation to the important questions that loan officers should ask when analysing loan applications.
[15 marks]
b) Critically discuss the different tools that banks can use to reduce credit risk.
[15 marks]
Notes:
– Where appropriate, refer to the banking literature and use data to support your discussion.
– Word limit: 800.
QUESTION 2.
a) Discuss the advantages [7 marks] and disadvantages [7 marks] of the public (vs. private) ownership in central banks. Give a historical example for each type of ownership [6 marks].
[20 marks]
Word limit: 500.
b) Explain and give a real-life example for each type of bank resolution policy (bail-outs, etc.) that can be undertaken by the governments around the world by referencing a [credible] online news source and including the related weblink in your references at the end.
[30 marks]
Word limit: 800.
