Banc One
Case Brief
2. What are AIRS? How do they work? Why is Banc One using them so extensively?
AIRS are a method of CMOs (Collateralized Mortgage Obligations). They have the
advantages of normalized swaps and the risk and return of CMO investments. Banc One
used the AIRS to receive the benefit of high yields in exchange for taking on the
prepayment risk.
AIRS function as mortgage securities; clients pay their mortgages when interest rates are
low. The amount of swap decreases when the interest is low. However, if interests rates are
high, the maturity would be extended. AIRS would offer higher yield when interest rates
are within certain range. In case the rates rise or fall sharply the yield will fall. Banc One
used a policy to reduce the effect of fluctuating interest rates on their earnings. To do this,
they did not change their earnings more than 5% for any 1% change in rates.
Banc One created a swap portfolio, the portfolio allowed them to pay a floating rate and
received a fixed rate, because Ban One As Banc One grew through their various businesses
and through acquisitions, they created more earnings, and a more asset sensitive position.
This created the need for the bank to use AIRS extensively; as they became a means for
them to remain within their set policy limits.
3. What are basis swaps? Why has Banc One recently significantly increased its basis swap
position?
Basis swaps are swaps that allow two sides to swap variable interest rates based on
