Money and banking - Assignment Example

In this context, Commerce National Bank reports interest-sensitive assets of $870 million and interest-sensitive liabilities of $625 million during the coming month. This implies that Commerce National Bank is an asset sensitive one. Since Commercial National Bank is asset sensitive, if interest rates rise, the bank will definitely enjoy a net interest margin. The bank’s productivity on interest income and earning interest will raise its basis point for basis point in line with the market. If the rates fall, it will have its net interest margin compressed.

Securitization Securitization of assets refers to the process of collecting various sorts of debts such as car loans, mortgages, or credit card debts and packaging them as bonds, collateralized mortgage obligations, or as pass-through securities. They are then sold to investors. This process can consist of any type of financial assets and it is aimed at reinforcing liquidity in the marketplace. It is also vital for smaller investors to buy shares in a more complex pool. The most amenable assets used in the securitization process include equipment, trucks, automobiles, home equity loans, recreational vehicles, and credit cards.

Alternatively, asset-backed deals especially for exotic assets may include: consumer loans, computer leases, time shares, trade receivables, and small commercial loans. Securitization offers numerous benefits to investors, purchasers, and financial institutions. It provides financial lending institutions with a technique to remove assets from their balance sheets, thus raising the pool of obtainable capital to be lent out. In addition, lending institutions are given a chance to utilize their assets to get funds, and most specifically, replacing the lower-yielding assets with higher-yielding ones.

From the lending institutions and the regulator’s perspectives, there are some risks associated with the securitization process. This may involve such risks as banks using the best quality assets in the procedure, which implies that the remaining portfolio may be more dangerous averagely. This will lead to an increase in the lending institution’s capital requirements. Banks and other lending institutions choose to do this because investment activities balance the benefits that loans offer.

In overall, investments demonstrate less credit risks as compared to loans, as well as permitting lending institutions to expand to various places that loans cannot allow. Investment securities also give extra liquid reserves wherever more money is required, help banks to reduce their contact with huge taxes, serve as a prevaricate against losses as a result of the evolving interest rates, and offer collateral as needed by the regulations. There are prepayment and interest rate risks associated with securitized assets.

This happens when borrowers pay off or default particular loans in the securitized-asset pool prematurely. The reason behind this may be due to the fall of interest and the substitution of old loans at lower loan rates. Prepayment risk may noticeably lower the security values backed by such loans and alter their appropriate maturities. Further, the considerable drawbacks in these investments such as declining in their market values as the principal assets may lead to increase in default rates.

Liquidity Total assets Sales of bank assets are projected to be $18 million Total