Commercial Banking Real Interest Rates

Question: Discuss about theCommercial Bankingfor Real Interest Rates. Answer: Evaluating the Interest Sensitivity Report and Depicting its Shortcomings: The evaluation of interest rate sensitivity report of Keystone National bank mainly states the difference in interest change of the assets and liabilities conducted by the company. In addition, the duration of interest rate gap mainly analyses the difference in asset and liabilities for different time group. In this context, Moessner, de Jansen (2014) mentioned that interest sensitivity report is mainly helpful in detecting the overall change in gap between assets and liabilities accumulated by the company. In addition, Keystone National Bank for has effectively depicted their sensitivity report regarding the excess accumulation of liabilities that is been conducted from the duration of 8 to 365 days. However, the bank has accumulated higher assets in the end. Choi, Richardson Whitelaw (2016) stated that change in interest rate accumulation could effectively help the investors in determining the authenticity of the banks profitability and market value equity. In addition, the evaluation of interest rate sensitivity report mainly depicted that the objectivity of maximising the interest income is not achieved by the bank. Furthermore, the cumulative GAP as percent of assets is relatively negative, which is in turn decrease the overall asset accumulation of the company. In addition, the time bucket depicted in exhibit report mainly portrays that 7-18 as period has positive gap. However, the other time series have a negative interest rate sensitivity gap, which indicates that a fall in interest rates could help the company to achieve higher profits. In this context, Janssen Morhs (2015) mentioned that most of the gap analyst fails to detect the variability in interest and non-interest revenue or expenses, which reduce the valuation of interest sensitivity risk. However, Swanson Williams (2014) argued that the gap analysis mainly omits the spreads that could come from market interest rate changes. Providing Effective Recommendations to Keystone National Bank for Improving their Earnings Performance and Financial Strength: The overall satiation that is been depicted in the exhibit 6 mainly indicates the rinsing loan demand is currently possible and a decrees in interest rate could be considered. This rising demand in loans and decrease in short-term interest rate payment might mainly have a positive effect for Keystone National Bank. Trujillo (2013) stated that banks with the help of declining short-term interest rates are able to generate higher income from long-term loan. On the contrary, Dell?Ariccia, Laeven Marquez (2014) criticises that during an economic crises the overall demand for loans decreases, which in turn hamper the revenue generation capacity of the company. Improvement in Income: The rising demand from loans among potential business could be accumulated by Keystone National Bank, which in turn might help in improving the overall revenue. In addition, the long-term loans that have high interest rates could be provided to electronics, automotive, accessories manufacturing and building material companies. In addition, the recession that might incur in short term could help in reducing the funding cost of the company. Increased Accumulation of Loans: Furthermore, the increased demand of loans, which might be generated from business, could help the company to gather high interest yielding loans. In addition, during the recession period the company might gather short-term loans at low interest rate and provide long-term loans to business are higher long-term interest rate. The accumulation of loan based on this strategy could help Keystone national bank to improve their overall financial position and in generate higher revenue. In addition, the competitive deposit rate, which could also help in high cash accumulation that might be conducted by the company. Furthermore, the accusation that is been done in the recession period will only be conducted on low deposit rate, which might help the company to reduce its overall cost of financing and improve its expense structure. Moreover, the fall in 200 basis point of short-term interest rate and an increase in only 100 or 50 basis points could help the company in gathering capital in short term interest rates. However, the main operations of the bank are to borrow capital in short term basis and lend it on long-term basis. Thus, the rising loans demand and recession augmentations could help the company in borrowing the required capital in short-term low interest rate. Moreover, the gathered capital might effectively be lent to the business, which require fund on long-term high interest rate basis. This structure might mainly help the company to improve the financial position and in turn reduce its overall expenditure on capital accumulation. Reference: Choi, J., Richardson, M. P., Whitelaw, R. (2016). On the Interest Rate Sensitivity of Corporate Securities: Implications at the Firm and Index Level. Dell?Ariccia, G., Laeven, L., Marquez, R. (2014). Real interest rates, leverage, and bank risk-taking.Journal of Economic Theory,149, 65-99. Janssen, R., Morhs, R. (2015).The interest rate sensitivity of Luxembourg bond funds: results from a time-varying model(No. 98). Central Bank of Luxembourg. Moessner, R., de Haan, J., Jansen, D. J. (2014). The effect of the zero lower bound, forward guidance and unconventional monetary policy on interest rate sensitivity to economic news in Sweden. Swanson, E. T., Williams, J. C. (2014). Measuring the effect of the zero lower bound on medium-and longer-term interest rates.The American Economic Review,104(10), 3154-3185. Trujillo-Ponce, A. (2013). What determines the profitability of banks? Evidence from Spain.Accounting Finance,53(2), 561-586.