Question

Asset	Commonwealth Bank		ANZ Bank		NAB Bank		Average
	Amount (m)	%	Amount (m)	%	Amount (m)	%	Amount (m)	%
Cash	42,814	4.47%	68,048	7.58%	42,152	5.18%	51,004.67	5.73%
Interbank loans	8,678	0.91%	5,504	0.61%	35,030	4.30%	16,404.00	1.84%
Trade securities	31,127	3.25%	43,605	4.86%	45,637	5.60%	40,123.00	4.51%
Investment securities	79,019	8.24%	69,384	7.73%	42,029	5.16%	63,477.33	7.13%
Loans	647,503	67.53%	574,331	64.00%	468,277	57.49%	563,370.33	63.28%
Other assets	148,711	15.61%	136,454	15.21%	181,391	22.27%	155,852.00	17.51%
Total assets	958,852	100%	897,326	100%	814,516	100%	890,231.33	100%

Using the table to answer the following about CASH

1.The purpose and importance of the type of asset;

2.The monetary size of the asset compared to the total assets of banks and reasons for the average size of the type of asset;

3.The risks that the bank run due to holding the type of asset;

4.Methods/instruments that banks use to hedge the risks pertaining to this type of asset;

5.The income generated from the type of asset compared to the income generated from other type of assets;

Answer 1

1. It is a type of current asset and is required for maintaining liquidity. Every company including banks likes to keep certain amount of money in the form of liquid assets or just ready cash for making quick emergency payments.

2. Compared to other assets, the size is low because it is required for maintaining a certain percentage of liquidity. Huge amount of unused cash is not desirable. It is only required for emergency purposes. This is why the holding percentage is so meagre compared to other assets in all banks. Of all the three banks ANZ banks has the highest cash percentage and the overall average is 5.53% of total assets.

3. The bank runs liquidity risk if the cash it holds is not sufficient for its current needs. Liquidity risk is inability of company to convert its securities or assets into cash to meet its short term liabilities.

4. Liquidity risks are hedged using financial derivatives. Future and options are widely used to reduce the impact of this risk which entails sharp rise and fall in price of underlying security or value of currency in case of international transactions.

5. Cash is not a source of income unless it is invested. It is required for making quick payments. Other assets are all sources of income for banks. Loans earn interests for banks. So do Investment in securities which earns returns. For banks, loans are the biggest generator of income.