Rhinestone National Rank reports the following figures in its current Report of
ID: 2723251 • Letter: R
Question
Rhinestone National Rank reports the following figures in its current Report of Condition: Evaluate the funding mix of deposits and nondeposit sources of funds employed by Rhinestone. Given the mix of its assets, do you see any potential problems? What changes would you like to see management of this bank make? Why? Suppose market interest rates are projected to rise significantly Does Rhinestone appear to face significant losses due to liquidity risk? Due to interest rate risk? Please be as specific as possible.Explanation / Answer
A) The different ratios of Rhinestone national bank are calculated below
Core deposits/Assets=8.00 percent
Large Negotiable CDs/Assets=24.00 percent
Deposits placed by Brokers/Assets=10.40 percent
Other Deposits/Assets=7.20 percent
Money Market Liabilities/Assets=31.20 percent
Other Liabilities/Assets=10.40 percent
Equity Capital/Assets=8.80 percent
The proportion of core deposits at Rhinestone is exceptionally low, while large CDs and other money-market borrowings make up more than 55 percent of the bank’s total funding sources. This funding mix tends to subject the bank to excessive vulnerability to quick withdrawal of funds and high interest-rate risk exposure. Rhinestone also appears to be excessively dependent on brokered deposits which are highly volatile and interest-sensitive. Adding in these brokered deposits, more than half of Rhinestone’s assets are funded with highly interest-sensitive deposits and money-market borrowings. Management needs to expand the bank’s core deposits and other more stable funds sources having less sensitive interest rates.
B) If interest rates rise, Rhinestone will experience higher interest costs immediately or within hours or a few days on at least 50 percent of its funding sources. Unfortunately ,all but $65 million of its $625 million in total assets are longer-term, inflexible assets whose interest yields cannot be adjusted as rapidly as the interest rates to be paid out on the bank’s liabilities. Other factors held equal, the bank’s earnings will be squeezed .Management need to do some serious restructuring work on both sides of the bank’s balance sheet in moving toward more flexible-return assets and more flexible-cost liabilities, and to move toward greater use of interest-rate hedging techniques
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