The underlying goal of commercial bank management is to maximize the wealth of t
ID: 2630212 • Letter: T
Question
The underlying goal of commercial bank management is to maximize the wealth of the bank's shareholders, which implies maximizing the price of the bank's stock (if the bank is publicly traded). A bank's board of directors needs to monitor bank managers to ensure that managerial decisions are intended to serve shareholders. What strategies can you implement to ensure the effectiveness of the above principles? Which do you think would be the easiest to implement? Why? In your opinion, what is the best way for a bank to manage its liquidity?
Explanation / Answer
A bank's board of directors needs to monitor bank managers to ensure that managerial decisions are intended to serve shareholders. What strategies can you implement to ensure the effectiveness of the above principles?
First, there has to be a check and balance system in place. The board has the responsibility to ensure the managers are wroking to maximize shareholder return but someone has to check on the board and it's performance in doing this. One way of achieving this is through large shareholder monitoring, discussion at annual meetings and active participation that influences the board. A second way is through outside and independent third party consultant monitoring firms that oversee the boards actions and provide feedback, annual reviews and best industry practices and suggestions to the board.
Which do you think would be the easiest to implement? Why?
The easiest and fastest to implement is a third party independent firm that monitors and provides recommendations. This option requires the last internal resources. The other options of involving share holders is a great option but takes considerable time and may not even be possible if the shareholders choose to not get actively involved.
In your opinion, what is the best way for a bank to manage its liquidity?
Make smart loans and business decisions. Also, keep adequate cash reserves on hand to pay existing debt or customer cashouts on their loans. Please note, this means adequate cash reserves but not excessive cash reserves. If reserves become excessive, then it is not being invested efficiently to maximize shareholder return.
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