hard · Frm Part 2 Liquidity & Treasury Risk
A Treasury department is managing the bank's 'repricing gap'.
If the bank has more rate-sensitive assets (RSA) than rate-sensitive liabilities (RSL) in the 3-month bucket, what is the impact on Net Interest Income (NII) if interest rates fall?
- NII decreases; the yield on assets falls faster than the cost of funding.
- NII increases; the bank benefits from a higher 'spread' between fixed and floating rates.
- NII is unchanged; the 'duration gap' protects the economic value of equity.
- NII decreases; falling rates lead to higher loan prepayments that reduce the asset base.
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