CGAP Ratio

# CGAP Ratio - If rates are expected to rise, does the FI...

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CGAP Ratio 1 Is \$15 million good or bad? It depends on what interest rates do! FIs express the result as a ratio to provide a comparative measure to gauge company trends and exposure compared to other FIs. CGAP Ratio: CGAP ÷ Assets

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Impact of CGAP on NII (Equal Rate Changes) 2 This chart illustrates the impact CGAP has on NII due to changes in interest income versus interest expense. Assumes rates change equally for rate sensitive assets and liabilities. Row CGAP ∆ in Rates ∆ in NII ∆ in Int Rev ∆ in Int Exp 1 Positive > 2 Positive > 3 Negative < 4 Negative <
Example – Equal Rate Changes 3 Suppose rates rise 1% for RSAs and RSLs, where the CGAP is \$15 million. What is the expected annual change in NII? NII = CGAP × R NII = \$15 million × .01 = \$150,000

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Managing Interest Rate Risk 4

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Unformatted text preview: If rates are expected to rise, does the FI want a positive or negative CGAP? Row CGAP in Rates in NII in Int Rev in Int Exp 1 Positive > 2 Positive > 3 Negative < 4 Negative < Unequal Rate Changes 5 Generally, rate changes happen unequally for RSAs and RSLs. While rates generally move in the same direction, they are not perfectly correlated. The FI, therefore, must be concerned about the: Direction of rate changes. Unequal Rate Changes Example 6 Say, RSA rates increase 1.2% and RSL rates increase 1.0%. Instead of using: NII = CGAP R where, NII = \$15 million .01 = \$150,000 We need to deconstruct it into two pieces: NII = (RSA RRSA ) - (RSL RRSL )...
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## This note was uploaded on 01/26/2012 for the course FIN 4620 taught by Professor Patriciarobertson during the Spring '12 term at Kennesaw.

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CGAP Ratio - If rates are expected to rise, does the FI...

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