Question

Liability management plays a critical role in the risk - return profile of banks. In the present deregulated environment, banks have to balance profitability and risks while deciding on their liability mix. As a banking student, evaluate the above statement.

Answer 1

ANS: Liability management is a practice by the bank of maintaining a balance between the maturities of assets & labilities in order to maintain its liquidity & facilitate the lendings.

The primary objective of Liability management is to maximise earnings & return on assets within the acceptable level of risk.

In Banks, there are assets & liabilities which are loans & deposits. Banks in the deregulated enviornment can raise liabilities & dispose their assets. A widespread measure of bank profitability is Return on assets, this is calculatedd by dividing Bank's net income by its total or average assets. The key areas from where bank increases its profitability are-

• Achieving balancesheet efficiencies
• Compliance management
• Enhancing cybersecurity
• Better customer management
• Mergers & Acquisitions

There are various types of risk of bank such as- credit risk, market risk, operational risk, liquidity risk. To protect it from such risk bank should have to follow the Risk management process by covering all the exposed risk relating to operations, Internal control system etc. A prudent Risk management can help a bank to improve profit as they sustain fewer losses on loans & investments. So, ultimately bank have to put a balance between its profitability & risk.