NORWEST CORPORATION

P
1.0 Answer Question 1

Assume an immediate and sustained 1 percent across-the-board rise in interest rates. Based on a review of Exhibit 3, discuss how one would use interest rate-sensitivity gap information to estimate the impact of rising interest rates on the earnings of Norwest Corporation.

Interest sensitivity gap is used to measure how the interest change will affect the asset sensitivity and liability sensitivity. Asset sensitivity or positive gap occurs when the interest sensitive asset and interest sensitive liability is greater than zero. However, liability sensitivity incur when interest sensitive asset and interest sensitive liability is less than zero.

Table Exhibit 3 | Within 6 Month(‘000) | Within 6 Month- 1 Year(‘000) | 1 Year – 3 Years(‘000) | 3 Years – 5 Years(‘000) | After 5 Years(‘000) | Interest-sensitive asset | 31822 | 5841 | 8666 | 4798 | 28705 | Interest –sensitive liabilities | 32811 | 4505 | 7492 | 3480 | 31544 | Total Asset | 31822 | 5841 | 8666 | 4798 | 28705 | | | | | | | Dollar GAP | (4849) | (3317) | (990) | 1194 | - |

Below show the formula that using to estimate the impact of rising of interest rates on the earnings:

∆NIIexp = GAP X ∆iexp

Where,

∆NIIexp = the expected change in net interest income over a period of time from some base amount.

GAP = cumulative GAP over the interval through the end of the period of time

∆iexp = the expected permanent change in the level of interest rates.

When there is an immediate and sustained 1 percent across-the-board rise in interest rates, the impact on each of the period will be as follows:

* Within 6 months,

∆NII = (-$4,849 million) (0.01) = -$48.49 million

* Within 6 Month to 1 year,

∆NII = (-$3,317 million) (0.01) = -$33.17 million

* 1 year to 3 years,

∆NII = (-$990