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Balance Sheet Type | Asset Liability Management [Video]

Balance Sheet Type | Asset Liability Management

Financial instruments can be fixed or floating and short-term or long-term. Floating instruments can also reset at different intervals. These details are important because they determine how interest rate shocks affect the bank’s net interest income (NII).

Due to the different terms and rate settings of financial instruments, a bank’s balance sheet can be asset-sensitive or liability-sensitive.

Asset-sensitive means an increase in interest rates would increase NII, whereas a decrease in increase interest rates would decrease NII.

Liability-sensitive means an increase in interest rates would decrease NII, whereas a decrease in increase interest rates would increase NII.

How can you tell whether a bank’s balance sheet is asset-sensitive or liability-sensitive?

The first step is to quantify the impact on NII from various interest rate scenarios. For example, a bank could examine how an increase of 100 basis points would affect its NII.

The next step is to take action to mitigate the interest rate gap risk and reduce the earning gap. Banks can do this with matched maturity funding and/or matched rate funding.

Matched maturity funding means funding short-term assets with short-term liabilities, and funding long-term assets with long-term liabilities.

Matched rate funding means funding fixed-rate assets with fixed-rate liabilities and funding floating-rate assets with floating-rate liabilities.

It’s not easy to match the maturities and rates of assets and liabilities. Thus, banks also use interest rate swaps and basis swaps to manage risk.

Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education accessible to all people.

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Resources for Accountants

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Resources for Accountants

Application of ASC 805 [Video]

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Advanced Issues and Disclosures [Video]

This is the introductory video to our self-study eLearning course "Business Combinations: Advanced Issues and Disclosures." Check it out here: https://www.gaapdynamics.com/product/business-combinations-advanced-issues-and-disclosures/ This is the second course of the three-part Business Combinations eLearning series. Now that you are familiar with the basic accounting rules, this course dives deeper into more advanced business combination issues such as exceptions to general guidelines, noncontrolling interests, and measurement period adjustments. Learn more about GAAP Dynamics: https://www.gaapdynamics.com/ Check out our other online courses on the GAAP Dynamics Learning Library: https://www.gaapdynamics.com/individual-learning/ Subscribe to GAAP Dynamics to see more videos like these!