Interest Margin & Portfolio Analysis

Based on the above referenced analyses and an assessment of current and projected economic conditions, it is suggested that the bank adopt an interest rate policy with an objective of maintaining a net interest rate margin equal to or higher than the 90-day Treasury bill rate plus 0.25 percent. At the present time, the net interest rate margin for the bank is meeting this objective. As the findings of the analyses presented in the exhibit indicate, however, any scenario analyzed other than the static rates option will cause the interest rate margin for the bank to drop below the minimum suggested interest rate policy.

Trends in the United States financial markets support the suggested interest rate policy, as well as indicating that some change in the bank's investment portfolio composition will be required to assure that the objective of the interest rate policy is attained. With a federal budget compromise agreed upon between the Congress and the Administration, the relevant national economic consideration for the bank is the strength of the so-called real economy. The evidence indicates that inflation risks are rising, that an upward adjustment in bond market yields

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1996 and in 1997. For all of 1996, this scenario would produce growth that was somewhat below forecasts made earlier by the Federal Reserve. In line with these expectations, the unemployment rate in the first-half of 1997 may move up somewhat from its recent relatively low level. Depository institutions have been especially important suppliers of credit to both businesses and households in 1996. Borrowers' demands have been concentrated in the types of credit in which depositories are traditional lenders and, on the supply side, commercial banks have continued to pursue new lending opportunities aggressively. The health and profitability of depositories have remained solid to date, although federal regulators have cautioned depositories that their lending standards should take account of the potential for deterioration of loan performance in a less favorable economic climate. The general tenor of the Federal Reserve projections is that the future of the banking sector in the American economy appears to be quite strong. Immediately prior to the general election, some observers of the financial market anticipated a Federal Reserve decision to raise the discount rate either just before the election or by January 1997. Thus
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Approximate Word count = 1964
Approximate Pages = 8 (250 words per page)

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