The Sensitive Bank
Assets Value Duration Liabilities + Owner's Equity Value Duration Rate Sensitive Assets $19 1 Rate Sensitive Liabilities $16 1 Fixed Rate Assets $1 5 Fixed Rate Liabilities $3 3 Bank Capital $1 0
a) If interest rates falls from 5% to 3%, what will happen to the bank capital of this bank?
b) After the interest rate change, will this bank be in compliance with bank regulations? Briefly explain.
c) If this bank wanted to insulate its balance sheet from interest rate changes, should they shift their liabilities towards fixed rate liabilities or rate sensitive liabilities? Briefly explain.