Revised Blog Assignment

                                                                  FRED, Federal Reserve Bank of St. Louis, 2014 

            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. grew steadily from the beginning of 2000 to the beginning of 2007. It seems that during that period of time, the U.S. economy was in a good condition with steady growth. However, 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 dropped dramatically during 2007 to 2009. It can be seen in the chart that the index dropped from 205 to 140. 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 lasted for quite a long time. The U.S. economy remained in recession and the housing price stayed  between 130 and 150 during that period. Not until 2012, the housing price started to climb again, and the climb in the housing price means that the U.S. economic is reviving. Although the housing price is growing as a relatively slow pace, still, it is good to know that the recession has finally come to an end.

                                                       FFIEC, Federal Financial Institutions Examination Council, 2014

The Uniform Bank Performance Report (UBPR) is an analytical tool created for bank supervisory, examination, and management purposes. In a concise format, it shows the impact of management decisions and economic conditions on a bank's performance and balance-sheet composition. Based on the UBPR above, Citibank and peer group are the participants being analyzed.

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, for example, there is a -11.2% gap for Citibank and -10.8% for Peer Group. 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 has 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 little damage to Citibank than to peer group, and the positive benefit that comes along with the better economic condition might benefit more Citibank than peer group.

                                                                                       Bloomberg, 2014

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 (T-Bill Rates-a short-term and risk free interest rate). Initial Jobless Claims will be the independent variable that test the degree of impact 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 continually accumulated data, Initial Jobless Claims was influenced only by the newest economic environment. Moreover, since INJCJC is being reported once a week, it reflects the latest information and changes. This run chart was drawn from Bloomberg Terminal Database and the reason that this period is worth carrying is because there is a significant trend.

In addition, the Subprime Mortgage Crisis in 2007 was well-known triggered by a large decline in home prices, resulting in mortgage delinquencies and foreclosures, also, in 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 was also being trading at lower rate simultaneously. However, when the market was recovering from the crisis, Fed Funds Rate target has still been set at 0.00 – 0.25 for a long periods. Even though there was an improvement in unemployment, the short-term rate was still set at a relatively low level.

In conclusion, 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 the cost of borrowing and to increase the money supply, resulting in a lower short-term T-Bill rate.