Financial Markets and Institutions (2-downloads)

Amount

($ millions)

Duration

(years)

Weighted 

Duration (years)

Assets

Cash and deposits

3

0.0

0.00

Securities

Less than 1 year

5

0.5

0.03

1 to 2 years

1

1.7

0.02

Greater than 2 years

1

9.0

0.09

Consumer loans

Less than 1 year

50

0.5

0.25

1 to 2 years

20

1.5

0.30

Greater than 2 years

15

3.0

0.45

Physical capital

5

0.0

0.00

Average duration

1.14

Liabilities

Commercial paper

40

0.2

0.09

Bank loans

Less than 1 year

3

0.3

0.01

1 to 2 years

2

1.6

0.04

Greater than 2 years

5

3.5

0.19

Long-term bonds and other long-term debt

40

5.5

2.44

Average duration

2.77

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584

Part 7 The Management of Financial Institutions

estimates of income gaps may not be very accurate. A similar problem occurs in

calculating durations of assets and liabilities because many of the cash payments

are uncertain. Thus, the estimate of the duration gap might not be accurate either.

Do these problems mean that managers of banks and other financial institutions

should give up on gap analysis as a tool for measuring interest-rate risk? Financial insti-

tutions do use more sophisticated approaches to measuring interest-rate risk, such

as scenario analysis and value-at-risk analysis, which make greater use of computers

to more accurately measure changes in prices of assets when interest rates change.

Income gap and duration gap analyses, however, still provide simple frameworks to

help financial institution managers to get a first assessment of interest-rate risk, and

thus they are useful tools in the financial institution managers’ toolkit.

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