Insights’ Liquidity Position: Use the Balance Sheet
Market Risk

Insights’ Liquidity Position: Use the Balance Sheet

Provided below is a comparative balance sheet for Insights Bank and Trust. Use this information to answer the question found below the table.

Comparative Balance Sheet for Insights Bank and Trust
Assets	September 1994	September 1993
Cash and balances due from depository institutions	$2,868	$2,759
Securities	19,618	24,635
Held-to-maturity securities	8,109	8,109
Available-for-sale securities	11,509	16,526
Federal funds sold and securities purchased under repurchase agreements to resell	0	100
Net loan and leases	22,918	15,217
Assets held in trading accounts	81	160
Premises and fixed assets	591	597
Other real estate owned	163	85
Other assets	521	427
Total assets	$45,860	$43,980
Liabilities
Deposits	$39,279	$37,610
Federal funds purchased and securities sold under agreement to repurchase	2,500	2,400
Other borrowed money	80	87
Subordinated notes and debentures	0	0
Other liabilities	900	900
Total liabilities	$42,767	$40,997
Total capital	$3,093	$2,983
Total liabilities and capital	$45,860	$43,980

Using the comparative balance sheet for Insights Bank and Trust, what has happened to the bank’s liquidity position over the last year? (Think about the basis for your assessment of its liquidity)
Increased
Decreased	The correct answer is Decreased. From the information presented here, the bank appears to be becoming less liquid. Its loans have grown rapidly over the last year. Although it has raised some deposits to fund the additional loans, most of the funding has come from the sale of securities. The management of the bank has been selling a liquid asset—securities—and then reinvesting the proceeds in an asset that is probably less liquid—loans. To understand fully the liquidity changes at Insights Bank, however, we would need additional information on the components of the loan, securities and deposit portfolios.
Stayed the same

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Quick Quiz: Market Risk

Market risk refers to the risk that an institution’s earnings and capital may be affected by changes in market rates or prices.
True
False	Market risk refers to the risk that an institution’s earnings and capital may be affected by changes in market rates or prices, such as interest rates, securities prices, commodity prices and foreign exchange rates. In this course, the discussion is limited to the effect of interest rate changes on a bank’s earnings and capital.

The largest source of market risk for most banks comes from their trading activities.
True
False	The largest source of market risk for most banks stems from the effects of interest rates on their earnings and capital via the balance sheet structure.

Options risk refers to the risk to a bank that comes from mismatching the maturity or repricing on its assets and liabilities.
True
False	Repricing risk comes from mismatching the maturity and repricing of assets and liabilities. Options risk comes from options that are explicitly or implicitly included in many products, such as the option to repay a loan early.

Even when a bank has no repricing risk, interest rate movements can still affect its bottom line performance and capital position.
True
False	Repricing risk is only one of four sources of interest rate risk. Basis, options and yield curve risk can affect a bank’s earnings and capital position.

Interest rate changes can have short- and long–term effects on a bank’s financial position.
True
False	In the short run, interest rate changes can affect a bank’s earnings. These short-term effects on earnings translate into long-term effects on capital. Because the prices of a bank's financial assets and liabilities changes instantaneously to reflect prevailing interest rates, the value of capital can change even before any earnings effects are recognized.