CAIIB Paper 2 Module D Quiz 8

Cumulative gap is the sum of the periodic gaps: −20 + 10 + 15 = +₹5 crore. The cumulative figure shows the net position over the combined horizon, subject to the model’s assumptions.

Approximate change in net interest income ≈ gap × rate change = ₹200 crore × 0.01 = ₹2 crore positive. This is a simplified estimate and ignores timing, basis, behavioural and non-parallel effects.

Approximate NII change = gap × rate change = −₹80 crore × 0.005 = −₹0.40 crore. A negative gap means liabilities reprice more than assets in the bucket, so a rate rise can reduce NII under the simple assumptions.

Net cash outflows in this simplified example = outflows minus eligible inflows = ₹240 crore − ₹90 crore = ₹150 crore. Actual LCR calculations apply detailed inflow caps, run-off rates and other regulatory rules.

Post-haircut value = ₹100 crore × (1 − 0.10) = ₹90 crore. Eligibility, caps and asset-category rules may further affect the amount recognised.

Incremental annual expense = ₹500 crore × 0.0075 = ₹3.75 crore. If asset income does not change, NII falls by approximately the same amount, all else equal.

Approximate price change = −modified duration × yield change = −3.2 × 0.0025 = −0.008, or −0.8%. This ignores convexity and other effects.

Estimated outflow = ₹400 crore × 15% = ₹60 crore. Actual regulatory run-off rates depend on deposit type, customer category and current rules.

RAROC = ₹9 crore ÷ ₹75 crore × 100 = 12%. The measure should be compared with the bank’s required hurdle using consistent methods.

New capital ratio = ₹90 crore ÷ ₹900 crore × 100 = 10%. The original ratio was 12%, so growth in RWA lowers the ratio if capital does not increase.

Long-duration fixed-rate assets can lose value when rates rise, while short-term deposits may reprice or leave quickly. This creates both interest-rate and funding liquidity concerns.

Stress results should prompt early action: secure committed funding where reliable, monetise available assets, reduce outflows where feasible and escalate under the contingency funding plan. Waiting until default is too late.

An unrealistic zero deposit-beta assumption can understate future funding costs, especially in competitive markets. Assumptions should reflect product characteristics, historical behaviour and plausible stress outcomes.

LCR can improve through more eligible HQLA or lower net cash outflows, but actions must comply with eligibility rules and consider profitability, market and operational impacts.

NSFR improves when available stable funding increases relative to required stable funding. Longer-term stable liabilities may help, while asset composition and regulatory ASF/RSF factors also matter.

Asset sales may create realised losses, transaction costs or market impact and reduce future interest income. Liquidity plans should evaluate these trade-offs and avoid over-reliance on fire sales.

A negative short-term gap can be addressed by changing asset repricing, liability tenor, funding sources or hedging. The choice should account for liquidity, profitability, customer demand and risk limits.

A credible severe scenario may combine institution-specific and market-wide shocks. Funding outflows can coincide with asset-market illiquidity, making contingency funding harder to obtain.

Actions can trade off near-term earnings and longer-term economic value. Management should evaluate both perspectives under multiple scenarios and within approved risk appetite.

Rapid asset growth funded by short-term borrowing can increase liquidity and refinancing risk and consume capital. ALCO should evaluate funding stability, stress liquidity, profitability and capital capacity.