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CMA Final · Risk Management in Banking and Insurance · Interest Rate Risk Management

A bank has rate-sensitive assets of Rs 840 crore and rate-sensitive liabilities of Rs 960 crore in the 0-1 year bucket. If market interest rates rise by 1.5 percentage points across the board, what is the expected change in annual net interest income from this bucket, using the simple repricing gap model?

Net interest income falls by Rs 1.80 crore. The gap is 840 minus 960, which is minus Rs 120 crore, a liability-sensitive position. Multiplying the negative gap by the 1.5 percent rise in rates gives minus Rs 1.80 crore, because more liabilities than assets reprice upward.

  1. ADecrease of Rs 1.80 croreCorrect
  2. BIncrease of Rs 1.80 crore
  3. CDecrease of Rs 12.60 crore
  4. DDecrease of Rs 14.40 crore

Explanation

Gap = RSA - RSL = 840 - 960 = -120 crore. Change in NII = Gap x change in rate = -120 x 0.015 = -1.80 crore, a decrease. Option Rs 14.40 crore uses only the liabilities' repricing (960 x 1.5%), and Rs 12.60 crore uses only the assets' (840 x 1.5%), instead of the net gap. The positive option ignores the sign of the gap.

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