9.3 Bank Management Principles #Notebook

 9.3 Bank Management Principles #Notebook

Bankers must manage their assets and liabilities to ensure three conditions:

1. Liquidity management. Has enough reserves to pay for outflows.

2. Asset management, earns profits by own a portfolio of remunerative assets. Liability management, to obtain its funds cheaply.

3. Capital adequacy management, sufficient net worth, or equity capital for regulatory.

To earn profits and manage liquidity and capital, banks face two major risks: 

1.Credit risk, the risk of borrowers defaulting on the loans and securities it owns.

2. Interest rate risk, the risk that interest rate changes will decrease the returns on its assets. 

The financial panic of 2008 reminded bankers that they also can face liability and capital adequacy risks if financial markets become less liquid or seize up completely.

＊In a bank's T-account, only equity capital can be negative.

An example of T-account...

Reference

Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation.  Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license.