Accounting Asset And Liability Management Assignment Homework Help
- November 20, 2017
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(1) You have just been appointed to the board of Mega Bank. You notice that the asset and liability management (ALM) policy and framework have not been updated for a number of years.
(i) Explain the process you would go through to ensure this update occurs to your satisfaction.
(ii) Given recent events (e.g. the global financial crisis), what areas do you think must be addressed in the ALM policy and framework? Justify your response, including three (3) examples.
(b) Discuss whether this process and the areas identified in part (a)(ii) would be different for a domestic commercial/retail bank compared to a global investment bank.
(2)This question is based on information available in the Westpac Group Annual Report 2012.
(a) Discuss potential sources of interest rate risk, including net interest income (NII) variance, and explain how Westpac manages this risk by component and in aggregate. (10 marks)
(b) Calculate how much subordinated debt Westpac holds as a liability and describe how it affects the quantum of interest rate risk.
(c) Estimate the portion of available liquid assets as a percentage of core lending assets. Are these used for gap management? Give reasons for your answer.
(3)This question is based on information in the following sections of the Westpac Group Annual Report 2012:
• Review of Group operations (pp. 79–90)
• Five year summary (p. 76)
• Note 3: Non-interest income (p. 143)
• Note 18: Deposits (pp. 165–166)
• Note 26: Average balance sheet and interest rates (pp. 185–188).
(a) Identify the significant movements in the income statement between 2011 and 2012. What was the single main driver behind these movements? Discuss why this is important when analysing spread and margin movements (for the 2012 period compared to prior periods). Consider in your response the effect of these movements on balance sheet indicators.
(b) Identify the impact of the significant movements in the 2012 period compared to 2011 on interest margins and spreads. To prepare your answer, refer to the sections of the annual report listed above and items relevant to Topic 5 of the subject notes. Explain why you think these movements are significant and the main drivers behind the movements.
Reference:
Westpac Banking Corporation 2012, Westpac Group Annual Report 2012,
Westpac Banking Corporation, viewed 14 April 2013,
http://www.westpac.com.au/about-westpac/investor-centre/annual_reports.
(4)This question is based on information available in the Westpac Group Annual Report 2012, Commonwealth Bank Annual Report 2012 and National Australia Bank Financial Report 2010.
(a) Describe the governance framework for Westpac’s liquidity risk management. Identify the structures and processes that are in place within Westpac in terms of governance and liquidity risk management. Compare this structure and process to Commonwealth Bank of Australia’s (CBA) approach and identify the differences. Hint: The websites of these two banks provide background information. Refer also to relevant APRA guidelines.
(b) Draw a table showing the 2010 and 2009 net repricing gap by time bucket for National Australia Bank (NAB). Compare the two gaps, with particular reference to the way the balance sheet has changed in structure over the year.
(c) Develop an estimate of net interest income and NII sensitivity for NAB over the next 12 months by rolling forward the balance sheet. Estimate the sensitivity to an instantaneous increase in the yield curve (parallel shift) by 200 basis points.
Assume that:
1. all assets and off-balance sheet items currently earn 5.24% and liabilities pay 3.51%
2.balances’ repricing dates are currently distributed evenly within each time bucket
3.there is no new business
4.all repricing business is allocated as per the current net repricing gap profile.
Hint: Use a table format.
(d) Explain what was occurring to interest rates in the 12 months leading up to September 2012.Discuss the impact this had on Australian banks and on NAB in particular.
Hint: Historical interest rates for loans and deposits can be accessed from the Reserve Bank of Australia website located at http://www.rba.gov.au.
References:
Commonwealth Bank of Australia 2012, Annual Report 2012, Commonwealth Bank of Australia, viewed 14 April 2013,
http://www.commbank.com.au/about-us/shareholders/financial-information/annual-reports.
National Australia Bank 2010, Annual Financial Report 2010, National Australia Bank, viewed 14 April 2013,
http://www.nab.com.au/wps/wcm/connect/nab/nab/home/About_Us/20/3.
Westpac Banking Corporation 2012, Westpac Group Annual Report 2012,
Westpac Banking Corporation, viewed 14 April 2013,
http://www.westpac.com.au/about-westpac/investor-centre/annual_reports.
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5.Assume you are the head of the asset and liability committee (ALCO) of a bank that has just completed a review of transfer pricing policies. Your balance sheet is very unusual in that the majority of assets are variable rate home loans but they are funded primarily with term deposits. Write a report on the findings of the review for the board of directors. The report should address:
(a) the entrenched problems of the balance sheet
(b) the difficulty in developing an asset and liability transfer policy given the structure of the balance sheet.
The report should also:
(c) identify issues that the transfer pricing reveals
(d) propose a transfer pricing policy to prevent the issues identified occurring in the future.
The proposed policy should address:
• capital
• interest rate risk
• liquidity
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