Question

● Summarize the most significant uses of the funds banks obtain; include a description of each and the risks involved. Next, discuss why a bank might invest in securities, even though loans typically generate a higher return; discuss risk as a factor. Finally, discuss how a bank might allocate funds to each type of asset and how this helps a bank to manage risk for the bank and its customers.

● Describe what is meant by bank capital and discuss how banks determine the optimal amount of capital to hold. Since a bank’s capital is generally less than 10% of its assets, discuss how this compares to the average capital structure of manufacturing corporations and explain this difference.

Answer 1

Answer:

1.

This question is replied in three sections as follows:

i.

Uses of funds Bank gets Funds assembled by bank are deployed to asset generation.

Different Assets generated are :

• Loan Assets
• Advances as Overdraft
• Investments in Securities and Equity,and
• Cash

Risks associated with Loan Assets is risk of default

Government Securities convey zero risk of default

Anyway , private debt securities are likewise exposed to default .

Investment in Shares are exposed to market risk.

ii.

Why Bank invest into securities despite the fact that loans ordinarily create a better yield .

Banks should keep up certain part of Deposits as Cash and Securities according to Central Bank rules. These, are protected and exceptionally liquid type of Assets to meet necessity of refund of deposits.

Bank invests into Loans which gives better yields, in any case, it carries higher risks as default.

iii.

Bank Fund Allocation

As referenced in different sorts of Assets like Loans, Advanced, Securities Shares and Cash.

Along these lines of assets assignment is done to minimise risk and maximize returns for the bank and its clients.

=============================================================

2.

Bank capital is the abundance of the sum which the bank has to the sum which bank owes. It is stored in the bank as money or different assets which are kept to meet the commitments which may emerge at the due time.

The amount of bank capital is commonly extremely less like 10% in light of the fact that it knows by its historical experience that all the individuals won't come to withdraw their cash simultaneously and since the working capital or administration segments is low, they can make do with low capital also dissimilar to the manufacturing sector. In manufacturing segment the working capital prerequisite is high in light of the fact that a lot of amount is required for crude materials, giving credit office, plant and equipment, compensation, borrowers/debtors and so forth.

So while the bank's capital is 10% of assets yet in the event of manufaturing the assets might be as high as 100% of the all out capital.

The bank keeps up its capital principally from the deposits made the clients while the assembling/manufacturing concern gets its capital as debt(debentures, advances) and equity(shareholders). The cost of capital of bank is lower when contrasted with manufacturing as bank acknowledges deposits at lower interest rates.