A study of interest rate risk for 1997 was measured using the Repricing Model (see Appendix A). According to the model, when interest rates rise 100 basis points, the net interest income (NII) for QNB increased in the bucket maturing in 1-7 days (by 675.06) and also in buckets maturing in 151-over 365 days, but for 8-150 day maturities, the NII decreased as a result. Maturities with negative periodic GAP indicate that a rise in short-term rates lowers NII because there are more rate-sensitive liabilities than assets in each of these buckets.
When interest rates decrease by 100 basis points, NII dropped by 675.06 for maturing buckets of 1-7 days with positive periodic GAPs, and it increased in buckets maturing in 8-150 days with negative periodic GAPs. Therefore, when the periodic GAP is negative, and the interest rate is negative, opposite results occur. As the number of day's increases in the maturing buckets through 150 days, the periodic GAP decreases, and NII begins to increase by smaller amounts. The 8-30 day maturity bucket was the most volatile with NII fluctuating from +/- 702.43 while the 151-180 day bucket was the least volatile (NII +/- 4.21).
If interest rates should move up and down 200 basis points, the NII increases or decreases by double the change of NII calculated in 100 basis points (see Appendix A).
The cumulative GAP (CGAP) is positive from 1-7 days but remains negative from 8-365 days. Interest rate sensitivity was solved (CGAP/Assets) to show the direction of the interest rate exposure. According to the results, when the CGAP is positive (and vice versa), the change in NII is positively related to the change in interest rates. In conclusion, for QNB to be successful in the short-run, interest rates must continuously decrease for the year.
The federal funds rate for January 1, 1997, was 5.25 and at year end was 5.50. For January 1, 1998, it was 5.56 and is forecasted to decrease and be at 4.