You are analyzing the exposure of a bank’s income to interest rate risk using the repricing model. You collected the data below on the bank’s liabilities and equity from its balance sheet (all values are in $Millions).

Liabilities and Equity

Equity: 425

Demand Deposits: 1097

Savings Accounts: 708

3-Month CDs: 177

6-Month CDs: 354

2-Year CDs: 354

Fed Funds (overnight): 71

6-Month Commercial Paper: 142

2-Year Debt (Fixed Rate): 212

Liabilities and Equity: 3540

You are analyzing the response of a bank to interest rate changes over a one-quarter horizon after an initial increase in rates. For the purposes of an initial analysis, you decided to assume that savings deposits are not rate sensitive.

Estimate the rate-sensitive assets (RSLs) over this time horizon.

Question

You are analyzing the exposure of a bank’s income to interest rate risk using the repricing model. You collected the data below on the bank’s liabilities and equity from its balance sheet (all values are in $Millions).

Liabilities and Equity

Equity: 425

Demand Deposits: 1097

Savings Accounts: 708

3-Month CDs: 177

6-Month CDs: 354

2-Year CDs: 354

Fed Funds (overnight): 71

6-Month Commercial Paper: 142

2-Year Debt (Fixed Rate): 212

Liabilities and Equity: 3540

You are analyzing the response of a bank to interest rate changes over a one-quarter horizon after an initial increase in rates. For the purposes of an initial analysis, you decided to assume that savings deposits are not rate sensitive.

Estimate the rate-sensitive assets (RSLs) over this time horizon.

BlackTom AI · Accepted Answer

Rate-sensitive liabilities (RSLs) are liabilities that will reprice or mature within the analysis horizon. Over a one-quarter (three-month) horizon, include only instruments that reprice or mature within three months.

Relevant concepts:
- Repricing horizon = 3 months. Only instruments with maturity or repricing ≤ 3 months count as rate-sensitive.
- The problem explicitly states savings deposits are not rate-sensitive for this initial analysis.
- Core / demand deposits are treated here as non-rate-sensitive (the prompt gives no rate-sensitivity for demand deposits, so we exclude them).

Step-by-step identification and calculation:
1. Examine each liability and decide if it reprices within 3 months:
   - Demand Deposits (1097): treated as core/non-rate-sensitive → exclude.
   - Savings Accounts (708): explicitly assumed not rate-sensitive → exclude.
   - 3-Month CDs (177): mature/reprice at 3 months → include.
   - 6-Month CDs (354): reprice at 6 months → exclude.
   - 2-Year CDs (354): >3 months → exclude.
   - Fed Funds (overnight) (71): immediate repricing (overnight) → include.
   - 6-Month Commercial Paper (142): >3 months → exclude.
   - 2-Year Debt (Fixed Rate) (212): fixed long-term >3 months → exclude.
   - Equity (425) is not a liability for repricing purposes → exclude.

2. Sum the included items:
   - 3-Month CDs = 177
   - Fed Funds (overnight) = 71
   - Total RSLs = 177 + 71 = 248

Why this is correct:
- Only instruments that will reprice within the one-quarter horizon are counted; that leaves precisely the 3-month CDs and overnight fed funds. Savings and demand deposits are explicitly or implicitly treated as non-rate-sensitive and longer-term instruments reprice after the horizon, so they are excluded.

Why other options are incorrect (briefly):
- 2053, 956, 3115, 744 all require including items that either are explicitly non-rate-sensitive (savings) or reprice after the 3-month horizon (6-month CDs, 2-year instruments, etc.), so they overstate RSLs for the one-quarter horizon.

Conclusion: The estimated rate-sensitive liabilities (RSLs) over the one-quarter horizon equal 248, matching the provided correct answer.

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