b) Calculate the NII and NIM for the current interest rate environment and for a + 2% and a -2% parallel shift in interest rates. Calculate the Earnings-at-Risk. (NB: The deposit rate cannot go below 0%.)
b) Calculate the NII and NIM for the current interest rate environment and for a + 2% and a -2% parallel shift in interest rates. Calculate the Earnings-at-Risk. (NB: The deposit rate cannot go below 0%.)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:### Topic: Impact of Interest Rate Changes on Net Interest Income (NII) and Net Interest Margin (NIM)
#### Scenario Analysis:
The table below demonstrates the calculation of Net Interest Income (NII) and Net Interest Margin (NIM) for the current interest rate environment, a +2% parallel shift, and a -2% parallel shift in interest rates. This analysis also includes the computation of Earnings-at-Risk (EaR).
| **Interest Income** | **No rate change** | **-2% parallel shift** | **+2% parallel shift** |
|--------------------------|--------------------|------------------------|------------------------|
| Loans – fixed rate | 13 | 13 | 13 |
| Bonds – fixed rate | 2.25 | 2.25 | 2.25 |
| Bonds – floating rate | 1.05 | -0.15 | 2.25 |
| **Total** | **16.3** | **15.1** | **17.5** |
| **Interest Costs** | | | |
| Deposits – fixed rate | 4.5 | 4.5 | 4.5 |
| Deposits – floating rate | 0.3 | 0 | 2.7 |
| NIBLs | | | |
| Capital | | | |
| **Total** | **4.8** | **4.5** | **7.2** |
| | | | |
| Net interest income (NII)| 11.5 | 10.6 | 10.3 |
| Net interest margin (NIM)| 2.09% | 1.927% | 1.872% |
| Earnings-at-Risk (EaR) | 7.826% | | 10.434% |
#### Explanation of the Table:
1. **Interest Income**:
- **Loans – fixed rate**: Shows a static interest income of 13 across all scenarios as fixed rates do not change with interest rate shifts.
- **Bonds – fixed rate**: Also remains unchanged at 2.25 under all scenarios.
- **
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