In: Economics
Name and explain the four areas of primary concern in bank management.
Bank executive's primary concerns:
Funds are to be bought at low cost.
The bank manager engages in risk management to maximize revenues by
raising funds at a low cost.
Capital must meet regulatory standards.
The bank manager engages in capital adequacy management to retain
and obtain capital
To satisfy three conditions, bankers must manage their assets and liabilities:
A bank has ample reserves on hand to pay for any outflows of deposits (net reductions in deposits) but not too many to make the bank unprofitable. This tricky trade-off is called managing liquidity. Its bank is earning profits. For this to happen, the bank must have a large portfolio of remunerative assets. This is called Wealth Management. It also needs to get its funds as cheaply as possible, which is called liability management. Their bank's net worth or equity capital is adequate to hold a buffer against bankruptcy or regulatory pressure but not so much that the bank is unprofitable.
Banks are faced with two major risks in their attempt to earn income and maintain liquidity and capital: credit risk, the risk of borrowers defaulting on the loans and securities they own, and interest rate risk, the risk that interest rate increases will decrease the returns on their assets and/or raise the cost of their obligations.