FORUM DESCRIPTION (a) Explain the following bank management activities: liquidit

Question

FORUM DESCRIPTION (a) Explain the following bank management activities: liquidity management, asset management, liquidity management, capital adequacy management, credit risk management, interest-rate risk management Consider the Loan Shark Bank (LSB) with the balance sheet shown below, which is subject to a 10 percent required reserves ratio. Use this information to answer parts (b) and (c). Assets Liabilities $100 Reserves Loans Securities $20 $80 $30 Deposits Loans from Comm. Banks Loans from the Fed Bank Capita $ 10 s 10 $ 10 (b) Given the information about LSB, consider the following two transactions. First, John deposits $2 in LSB. Then, Juan withdraws $5 from his savings account at LSB. Use a T-account to represent the changes in the LSB balance sheet from each transaction-that is, you need to show two T-accounts. Then, show LSB balance sheet after both transactions have taken place. (c) Given the information about LSB-discard the transactions from part (b,could LSB remain in business if it suffers a 10 percent loss in its securities? Explain your answer and show the resulting LSB balance sheet if this scenario occurs.

Explanation / Answer

Liquidity Management: Banks are often evaluated on their liquidity, or their ability to meet cash and collateral needs without incurring huge or losses. Liquidity management describes the effort of investors or managers to reduce liquidity risk exposure.

Asset Management: Asset management is the effective management of a client's cash and securities by a financial services company, usually an investment bank. The institution offers investment services along with a wide range of traditional and alternative product offerings that might not be available to the average investor.

Capital adequacy management: Capital adequacy is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets.

Credit Risk Management : Credit risk refers to the probability of loss due to a borrower’s failure to make payments on any type of debt. Credit risk management is the practice of mitigating losses by understanding the adequacy of a bank’s capital and loan loss reserves at any given time – a process that has long been a challenge for financial institutions.

Interest rate risk management: The management of interest rate risk is an important part of corporate risk management. The active management of interest rate exposure minimises the risk of incurring losses and opportunity costs from movements in interest rates.

b)

John deposits $2

Debit

amt

Credit

amt

Cash in bank

$2

Cash in Hand (John)

$2

$2

$2

Juan withdraws $5

Debit

amt

Credit

amt

Cash in hand(Juan)

$5

Cash at bank

$5

$5

$5

Bank account:

Debit

amt

Credit

amt

Cash withdraw

$5

deposit

$100

Balance

97

Cash deposit

2

$102

$102

Balance sheet of the bank

Assets

Liabilities

Reserves

20

Deposits

97

Loans

80

Loan from comm. banks

10

Securities

30

Loan from fed

$10

Bank Capital

$10

Loss

$3

Total

130

Total

130

c)

After 10% loss in securities

Securities 30

To Loss 3

To Bank 27

Debit

amt

Credit

amt

Cash in bank

$2

Cash in Hand (John)

$2

$2

$2

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