FIN20013 Banking Operations and Governance Assignment 2 Semester 2 2016 Instructions NOTE: THIS ASSIGNMENT IS DUE ON 30th Sept 2016 1. This assignment is to be completed individually. 2. Please submit the hardcopy but upload a copy of your assignment to Blackboard. However only the hardcopy of the assignments will be marked. 3. This assignment is marked out of 40%. It will late be adjusted and contributes 20% of the final mark for this unit. 4. Please state clearly, the name of your tutor and the tutorial class you are allocated to. Failure to do this will attract a penalty of (5/40) for the assignment. 5. The due date for this assignment is 30th September 2016 at 4:45pm. Students should make themselves aware of the Extensions Policy and Late Penalties Policy, which can be found in the FIN20013 Unit Outline. ** REQUEST FOR EXTENSION ON OR ONE DAY BEFORE DUE DATE WILL NOT BE ENTERTAINED **. 6. Assignment submissions must include an Assignment Coversheet which is available from the Blackboard website. 7. Students should ensure that they keep a hardcopy and an electronic copy of their assignment.F I N 2 0 0 1 3 A s s i g n m e n t 2 2 0 1 6 Page 2 Question PART A The book value of DRAGON SLAYER BANK's balance sheet is listed below. The current market yield for the securities is in parentheses. The amounts are in millions. Asset Liability & Equity Cash 55 Demand deposits 300 6 month T-bills (4.25%) 50 Savings accounts (2.0%) 205 2 year personal fixed rate loan at 6.50% 100 3 month CD (2.50%) 150 3 year T bills (4.85%) 100 9 months CDs (3.85%) 150 3 year 5.5% semi-annual coupon T-notes (5.25%) 90 1 year term deposit (4.0%) 520 5 year 6.2% semi-annual coupon T-notes (5.75%) 100 2 year term deposits (4.30%) 200 5 year personal loan (11.5%, repriced yearly) 350 5 year bond 8.0% annual coupon issued by Spanish government with rating credit rating B 150 5-year bonds at 6.75% semiannual interest, balloon payment 250 20-year bonds at 7.5% interest, balloon payment 250 10 year commercial loan (12.25% repriced @ 6 months) 730 Subordinate notes: 15-year commercial loan at 10% interest (repriced monthly) 220 3-year fixed rate (5.65%) 230 20-year sovereign bonds 12.0% annual-coupon issued by Cambodian government with BB rating 150 6-year fixed rate (6.00%) 150 Ordinary Equity 20 20-year mortgages at 8.5% interest (LVR 65%, no mortgage insurance), balloon payment^ 390 Preference shares 20 Retained Earnings 40 Total Assets 2485 Total liability and equity 2485F I N 2 0 0 1 3 A s s i g n m e n t 2 2 0 1 6 Page 3 Required 1. What is the cumulative repricing gap if the planning period is (a) 3 month (b) 2 year (2 + 2 marks) 2. What will happen to the net interest income of the bank, if interest on the banks rate sensitive assets is forecasted to decrease by 60 basis points and rate-sensitive liabilities to increase 25 basis points in 6 months' time? (4 marks) 3. Due to the uncertainty in the economy, based on the bank's estimate there is a potential of decrease in the demand deposits. What are some of the impact may that have on the bank's overall asset-liability? (4 marks) 4. Does the bank have sufficient liquid capital to cushion any unexpected losses as per the Basle III requirement? (ignore cyclical buffer requirement) (8 marks) PART B The following is the balance sheet of a VRY-SMPL Bank. All the items are recorded based on the book value and they were purchased at par value. Asset Liability 5 year semi-annual 6.45%pa coupon bond 250 6 months treasury bills 250 10 year 3.5% annual coupon bond 100 3 year semi annual coupon 5.50% bond 200 10 year treasury bond 7.5 % semi annual coupon 350 6 year annual coupon (6.30%pa) bond 200 Equity 50 700 700 5. Assume current market yield is flat at 6.5% p.a. What is the duration gap of the bank (6 marks) 6. Using the duration gap estimated from question 6, what will happen to the net worth of the bank if the market yield goes up by 1.5%p.a.?....................................................... (4 marks) 7. What is the maturity gap of the bank (2 marks) PART C (8 marks) -- word limit : 500 words The Basel Banking supervision committee has proposed the Basle III standards. • Compare and discuss the differences between Basle II and the Basle III. • What are some of the requirements (and issues) faced by the financial institutions in trying to meet these new requirements? (8 marks)F I N 2 0 0 1 3 A s s i g n m e n t 2 2 0 1 6 Page 4 Some notes: • Question 2 - Read Chapter 5. Or refer tutorial (topic 5) question 16 • Questions 2 to 4 - There is no word limit. However if you know the key issues, you should be able to explain your answer within 500 words. • Question 4, To avoid any confusion, please use the following link from APRA for conversion purpose. You mainly only require to refer to Attachment A and Attachment F. http://www.apra.gov.au/adi/PrudentialFramework/Documents/Basel-III-Prudential-Standard-APS-112-(January-2013).pdf