The Favorite Bank has the following balance sheet (in millions):
$\begin{array}{lr}
\text { Assets: } 1 \text { year Consumer Loans (rate 10\%) } & \$ 100 \
\text { Liabs.: } 10 \text {-year Certificates of Deposit (rate 9\%) } & \$ 80 \
\text { Equity: } & \$ 20
\end{array}$ True or False: The bank has a 1-year positive funding gap of $100 mil.
This implies that if rates rise, the bank's NIM will rise.

Question

The Favorite Bank has the following balance sheet (in millions):
 $\begin{array}{lr}
\text { Assets: } 1 \text { year Consumer Loans (rate 10\%) } & \$ 100 \
\text { Liabs.: } 10 \text {-year Certificates of Deposit (rate 9\%) } & \$ 80 \
\text { Equity: } & \$ 20
\end{array}$ True or False: The bank has a 1-year positive funding gap of $100 mil.
This implies that if rates rise, the bank's NIM will rise.

Quizplus · Accepted Answer

The bank has a 1-year positive funding gap of $100 mil. This means that the bank has more 1-year assets than 1-year liabilities. If rates rise, the bank will be able to earn a higher interest rate on its 1-year assets than it pays on its 1-year liabilities, which will increase its NIM.

The Favorite Bank Has the Following Balance Sheet (In Millions)