The graph above is to examine the correlation in
the period of recession (2007 – early 2009) between US
Initial Jobless Claims (INJCJC) and 90-days U.S. Treasury Bill Rates, which is
a short-term and risk free interest rate. Initial Jobless Claims will be the
independent variable to be tested the degree of impact that it has on 90-days
U.S. Treasury Bill Rates. Issued one week later than the initial claims at 8:30
EDT on Thursdays by the U.S. Department of Labor, Initial Jobless Claims is a
report that follows how many people first time apply for unemployment benefits
in the previous week. The amount increasing in Initial Jobless Claims indicates
the number that moves from employment part to unemployment part of the
working-age population. Different from Unemployment Rate, which is a
continually accumulated data, Initial Jobless Claims shows the net number that
influenced only by the newest economic environment. Moreover, since it is being
reported once a week, it reflects the latest information and changes. This
run chart was drawn from Bloomberg Terminal Database and the period worth
carrying is because there is a significant trend at that time. The Subprime
Mortgage Crisis in 2007 was well-known triggered by a large decline in home
prices, resulting in mortgage delinquencies and foreclosures and the devaluation
of housing-related securities. One year later, the bankruptcy of Lehman
Brothers set off the financial crisis of 2008. According to the run chart above,
we could easily identify that there is a negative relationship between INJCJC
and 90 Days T-Bill Rate (Shown as the indicating arrow). Between 18
September 2007 and 30 April 2008, the target Federal Funds Rate was lowered
from 5.25% to 2%. The short-term T-bill rate or so called “risk free” rate were
also being trading at lower rate simultaneously. However, when the market is
recovering from the crisis, Fed Funds Rate target has still been set at 0.00 –
0.25 for a long periods. Even though there is an improvement in unemployment,
the short-term rate is still set at a relatively low level. It is worthwhile to
note that unemployment stays or becomes relatively high, the Federal Reserve
would adjust the Fed Funds Rate to a lower level in order to decrease in cost
of borrowing and to increase in the money supply, resulting in a lower
short-term T-Bill rate.
The graph shows the
movement of the S&P 20-City Case-Shiller Home Price Index and the duration
is from 2000/01/01 to 2014/08/01. This index is the leading measure of U.S.
residential real estate prices, tracking changes in the value of residential
real estate both nationally as well as 20 metropolitan regions; many analysts
and economists use this index as a major indicator of U.S. economic indicator. As we can see in the
figure, the housing price in the U.S. grow steadily from the beginning of 2000
to the beginning of 2007. It seems that during that period of time, the U.S.
economic is in a good condition with steady growth. As the outbreak of subprime
crisis in the mid-2007, the situation turned the other way around. As the
result, we can see that the housing price drops dramatically during 2007 to 2009.
The subprime crisis not only forced the U.S. economic into a serious recession,
but also caused huge raise in unemployment rate and many bank failures during
that period. As we can see in the figure, the impact brought by the subprime
crisis last for quite a long time. The U.S. economic remains in recession and
the housing price remain fluctuating between 130 and 150 during that period.
Not until 2012, the housing price starts to climb again, and the climb in the
housing price means that the U.S. economic is reviving. Although the housing
price is growing in a relatively slow pace, still, it is good to know that the
recession has finally come to an end.
Based on the Uniform Bank Performance Report (UBPR), we can know that the reprising risk of Citibank was lower than
that risk of peer group from 2009 to 2013. That is to say, because the ratios
of mortgage loans and loans & securities over five years and over fifteen
years are all smaller than those ratios of peer group, these ratios indicate
that Citibank has lower mortgage loans and long-term loans and securities
during these five years.The graph above presents
the trend of the gap for both Citibank and peer group. As we can see in
the figure, the average gap for Citibank is much smaller than then peer group, and
the gap for both Citibank and peer group is getting more negative from 2009 to
2013. The negative gap suggests that not only Citibank, but the peer group is
liability sensitive. This means that if the interest rate goes up, all these
banks will suffer losses, but, for Citibank, the negative gap is much smaller
than the peer group, the magnitude of the impact of the raising interest rate
on Citibank might be smaller comparing to other Banks in peer group. The reason why Citibank
have much lower gap is that, in UBPR report,
Citibank has more short-term assets than peer group. The short-term earning
assets to total earning asset for Citibank is 51.02%, comparing with 24% for
peer group. We can conclude that,
since Citibank has lower gap than peer group bank, the negative impact of
raising interest rate might do much little damage to Citibank than to peer
group, and the positive benefit that comes along with the better economic
condition might benefit more on Citibank than peer group.
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