What do we mean by rate sensitivity? What are some examples of rate-sensitive as

Question

What do we mean by rate sensitivity?

What are some examples of rate-sensitive assets?

Why does it make sense for a proportion of fixed-rate mortgages to be considered rate-sensitive?

Why does it make sense for a proportion of checkable and savings deposits to be considered rate-sensitive?

What is the “spread effect?”

What are some of the weaknesses with the repricing model (funding gap analysis); i.e., what are some factors that the model ignores?

What are some of the problems of using the duration model (duration gap analysis) to assess the interest-rate risk facing banks?

Why is insufficient bank capital dangerous from society’s point of view?

What is supposed to happen to banks with negative capital?

What are some of the problems with using the book value of capital?

What determines the market-to-book ratio (difference between market and book values) of capital?

Why don’t banks hold more capital than they do?

What can banks do to increase the ratio of capital to risky assets?

Explanation / Answer

rate sensitivity - the measure of the fluctuation of the price of a fixed asset with reference to the interest rate environment Eg Bond sensitivity if the interest rate rises the price of a previously bought decreases as the availability of higher returns

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