In Chapter 7, the focus is interest rate risk management. Regulatory agencies began to collect relevant information in the 1980s when large numbers of thrifts failed due to their interest rate risk exposure at a time when market rates were increasing both in level and volatility. You will find Interest Rate Risk Analysis or Interest Sensitivity Reports included in both the UBPR and the Bank Holding Company Performance Report (BHCPR) as described in the appendix to Chapter 6. Both reports are available at www.ffiec.gov. This is one area where measurement within banks and BHCs is more sophisticated than the measures used by regulatory agencies. For instance, to date none of the regulatory agencies require their financial institutions to submit measures of duration gap.
A. Open your Excel Workbook and access the spreadsheet with Comparisons with Peer Group. On line 36, you find net interest income (NII) as a percentage of total assets (TA). This is one calculation of NIM. You may have noticed from a footnote in Chapter 6 that sometimes NIM is calculated using total assets as the denominator, and sometimes total earning assets (TEA) is used as the denominator as illustrated in Equation (7–5) . To transform the first measure of NIM(NII/TAA) to the second measure using TEA, we need to collect one more item from the FDIC’s Web site. Using the directions in Chapter 5’s assignment, go to the FDIC’s Statistics for Depository Institutions, www4.fdic. gov/sdi/, and collect from the Memoranda section of Assets and Liabilities the earning assets as a percentage of total assets for your BHC and its peer group for the two periods. We will add this information to this spreadsheet to calculate NIM (NII/TEA) as follows: 
B. Use your formula functions to generate the percentages in row 57. For instance, cell B57 B36/B56.
C. Once you have collected the data on NIM, write one paragraph discussing interest rate sensitivity for your bank relative to the peer group across the two time periods based on the NIM. Discuss what is revealed by the variation of NIM across time. See the following illustrative paragraph for BB&T using 2006 and 2007 Information.
Interest Sensitivity Analysis: Ex-post Comparison with Peers. The variation of NIM for an institution across time is affected by the interest rate risk exposure of the institution. BB&T’s NIM decreased from 3.50 percent in 2006 to 3.48 percent in 2007 while the average for their peer group decreased from 3.20 percent in 2006 to 3.19 percent in 2007. The difference in NIMs across years was 2 basis points for BB&T in comparison to 1 basis point for the peer group. The percentage change in NIMs was 0.57 percent for BB&T in comparison to 0.31 percent for the peer group. The larger difference/percentage change for BB&T relative to the peer group’s average for 2007 could have occurred for a number of reasons; however, it is indicative that BB&T was more exposed to interest rate changes than the average institution over this period.
Part Two: Interest-Sensitive Gaps and Ratios While the FDIC’s Web site is powerful in providing basic data concerning assets, liabilities, equity, income, and expenses for individual banks and the banking component of BHCs, it does not provide any reports on interest sensitivity. For individual banks such information is available in the UBPR, and for BHCs information is available in the BHCPR. (Note that these data are for the entire BHC and not an aggregation of the chartered bank and thrifts that we have used to this point.) We will access the BHCPR and create a report for the most recent year-end. You will use information from this report to calculate one-year interest-sensitive GAPs ( Equation 7–7 ) and one-year Relative IS GAP ratios ( Equation (7–11) ) for the two most recent years.
A. Using the BHCPR created for your BHC fill in rows 73 and 74. You will find net assets repriceable in one year-to-total assets in the Liquidity and Funding section and the dollar amount of average assets on page 1 of the report. Add your information to the spreadsheet as follows: 
B. Having acquired the above information, you have the Relative IS gap in row 73 and you will calculate the $ interest-sensitive gap by multiplying the Relative IS gap by average assets.
C. Write one paragraph discussing the interest rate risk exposure for your BHC. Is it asset or liability sensitive at the conclusion of each year? What are the implications of the changes occurring across the years? Using Equation (7–13) , discuss the effects on net interest income if market interest rates increase or decrease by one full percentage point. See the following illustrative paragraph for BB&T using 2006 and 2007 information. Interest Sensitivity Analysis—Implications from InterestSensitive GAPs and Relative IS GAP Ratios. Bank holding companies’ profits are affected by the interest rate risk exposures of their balance sheets. The relative interest sensitivity gap ratio for BB&T was 6.69 percent in 2006 and 11.52 percent in 2007 while its interest-sensitivity gap was almost $7.69 billion for 2006 and nearly $14.6 billion for 2007. This indicates that BB&T is asset sensitive and its exposure to interest rate changes increased during 2007. Using a one year time frame, we may explore the effects on net interest income from changes in market interest rates using the one-year Interest Sensitive Gap for 2006 and the following equation:
Change in NII = (Change in interest rate) * ($ gap)
If market interest rates increase by one full percentage point, the increase in net interest income is forecast as close to $146 million. If market interest rates decrease by one full percentage point, the decrease in net interest income is forecast as nearly $146 million. BB&T will benefit most from increasing interest rates.
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Changing market interest rates affect the profitability of many financial-service firms. For up-to-date information concerning the current interest-rate environment, use the Industry tab from S&P’s Market Insight, Educational Version database. Several sub industry categories should appear, including Consumer Finance, Diversified Banks, Diversified Capital Markets, Regional Banks, and Thrifts and Mortgage Finance.Once an industry group has been chosen you can download one or more S&P Industry Surveys using Adobe Acrobat. The Industry Surveys associated with the above categories include Banking, Financial Services Diversified, and Savings and Loans. Please download these particular surveys and read the information on Interest Rates in the Key Industry Ratios and Statistics section. Write a paragraph concerning recent developments in short-term market interest rates and a paragraph covering long-term interest rates.
