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FRM Part II · FRM Exam Part II · Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

A bank's balance sheet has a positive one-year cumulative repricing gap (rate-sensitive assets exceed rate-sensitive liabilities). Ignoring other effects, which change in market rates would most likely reduce the bank's net interest income over the next year?

A parallel fall in rates would hurt. With a positive one-year repricing gap, more assets than liabilities reprice within the year, so interest income falls by more than funding costs, reducing net interest income.

  1. AA parallel rise in interest rates
  2. BA parallel fall in interest ratesCorrect
  3. CNo change in rates but a steeper yield curve
  4. DA rise in rates applied only to fixed-rate long-term assets

Explanation

With positive gap, more assets than liabilities reprice within the year. When rates fall, asset income drops more than funding cost, so net interest income declines. A rise in rates would help the bank, so the first option is wrong.

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