Question

Q1. a) explain the relationship between personal financial planning and the 'life cycle' theory of consumption snad saving.

b) explain asset management and liability management within the context of a commercial bank funding its balance sheet. provide an example
of how a bank uses liability management when determining the structure of its balance sheet.

Answer 1

A) Relationship between personal financing planning and life cycle theory of consumption and savings states that when an individual will be having lower income, he would be more focused on borrowing and that spending the money, whereas when the individual will have higher income than their individual would be taking out a portion of his income and he would be trying to invest those income through savings,so it can be said that the personal financial planning is related to management of the finances where as the theory of life cycle consumption and savings will be related to saving of those money in order to invest and plan in advance so when the individual would be young,he would be less focused on savings where he would be growing in his age and his income would be growing then he would be e focusing on more towards savings and financial planning for his future objectives fulfilment.

B) Asset Management and liability management is one of the important factors of overall banking management because the bank will always be trying to improve its asset quality and it will also be trying to manage its liability so that it would be trying to maintain a match between its asset and liabilities and the banking companies will be always focused on to management of its balance sheet through management of assets like it would be trying to improve the quality of loans and it would be trying to eliminate the bad loans through its books of accounts by selling it on hair cuts to some asset reconstruction companies and it would also be trying to maintain the liability by negotiations with the creditors and depositors.

So, it can be summarised that the Asset Management and the liability management is one of the most important activities related to bank and Bank would be trying to always manage its Assets and liabilities.