Question

If the bank manager determines that her bank's gap is a positive $50 million, then a 0.5% decrease in interest rates will cause the bank profits to:_____

Answer 1

A positive gap of $50 million at the bank indicates more rate-sensitive assets than liabilities. Thus, a 0.5% decrease in interest rates would reduce the bank's profits, specifically by $250,000.

Step-by-step explanation:

When a bank manager refers to the bank's gap, it means the difference between the rate-sensitive assets and rate-sensitive liabilities. A positive gap of $50 million suggests that the bank has $50 million more in rate-sensitive assets than liabilities. If the interest rates decrease by 0.5%, the bank's income from assets will decrease more than the expenses on liabilities, negatively affecting the profits.

For simplicity, if we consider that all rate-sensitive assets and liabilities will be equally affected by the interest rate change, a 0.5% decrease in interest rates on $50 million would lead to a reduction in net interest income by 0.5% of $50 million. Calculating this decrease would result in a loss of:
0.005 (interest rate decrease) x $50,000,000 (gap) = $250,000

$250,000 is the estimated reduction in the bank's profits due to a 0.5% decrease in interest rates with the given positive gap situation.

Answer 2

A positive gap of $50 million in a bank's balance sheet means that with a 0.5% decrease in interest rates, the bank's profits will decline because the income from assets will drop more than the cost savings on liabilities.

Step-by-step explanation:

If the bank manager determines that her bank's gap is a positive $50 million, then a 0.5% decrease in interest rates will cause the bank profits to decline. A positive gap implies that the bank has more rate-sensitive assets than rate-sensitive liabilities. Thus, when interest rates fall, the income generated from these assets will decrease more than the cost of liabilities, leading to a reduction in profits. The extent of the profit change will depend on the size of the gap and the specific decrease in interest rates.