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Interest rate risk, credit rationing and minimum capital

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1) Interest Rate Risk
a) What is interest rate risk?
b) Discuss briefly the interest rate risk for Finansbank and make suggestions to deal with it

2) Credit Rationing
a) What is credit rationing?
b) From a practical point of view how would you proceed to distinguish credit rationing from a decline in credit supply?
c) Do you think that Finansbank is rationing its credits? Why? (You may defend the view that you do not have sufficient information to answer this question. Be sure that your brief answer is consistent with the one you gave in (b).

3) Minimum Capital Requirement
a) What is the purpose of introducing Minimum Capital Requirement for banks?
b) What are the weaknesses of this condition?
c) Is Finansbank well capitalized, under capitalized or over capitalized? Why?
d) How do you define optimal capital requirement using Finansbank as an example? Discuss briefly.

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Solution Summary

This solution answers various questions regarding interest rate risk, credit rationing, and maximum capital requirement.