MANAGING BANK FINANCIAL RISK: BANK OF THE PACIFIC COAST BANKING SCHOOL CASE
Asset & Liability Sensistivity as of 31 December 2003
As of 31 December 2003, the Bank held $450 million in interest rate-sensitive assets. As of the same date, the Bank had $293 million in interest rate-sensitive liabilities. At a gross level, the Bank is more asset sensitive than it is liability sensitive. The weighted average interest rate on the Bank's interest-sensitive assets is 5.27 percent compared with a weighted average interest rate of 1.645 percent on interest-sensitive liabilities. Thus, interest rate changes, in theory, would have a greater impact on the asset side of the Bank's balance sheet than on the liability side.
On the asset side of the balance sheet, however, investments and fixed-rate loans are less interest-rate elastic than are floating-rate loans. Thus, the $295 million in floating-rate loans are the most interest-rate sensitive of the Bank's assets. On the liability side of the balance sheet, certificates of deposit and long-term borrowing are less interest rate-sensitive than are the remaining interest rate sensitive liabilities, which total $158 million. The mean interest rate on floating rate loans (5.25 percent) is substantially higher than the weighted average interest rate (0.45 percent) on the $158 million in liabilities other than certificates of deposit and long-term borrowing. Thus, by any reasonable set of measurements, the Bank is more asset sensitive in relation to interest rate risk than it is liability sensitive to interest rate risk.
Projections for 2004 indicate that the Bank's income will increase over 2003 performance. The sources of the projected increases in income are (a) increases in total earning assets and (b) an increase in the interest rate margin at the level of total interest-sensitive assets and interest-sensitive liabilities. The focus of proposed on-balance sheet risk management s...