Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition

Solution to Stage Five

1:

Effective return net of reserve requirement = interbank rate × (1 – reserve requirement) For instance, for the one-year interbank rate of 3% and a reserve requirement of 10%, the effective rate is 2.7% (3% × (1 – 10%)). Net interest margin on deposits Net interest margin on deposits of 100 = (2.7% – 1.7%) × 100 = 1 Net interest margin on deposits of 200 = (3.15% – 2.15%) × 200 = 2 Total net interest margin on deposits = 1 + 2 = 3 Net interest margin on loans Net interest margin on loans of 200 = (6% – 4%) × 200 = 4 Net interest margin on loans of 300 = (8% – 5%) × 300 = 9 Total net interest margin on loans = 4 + 9 = ...