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 LOANS

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.Purpose and Importance:

Banks provide loans since banks engaged in finance business which receives money from public in the form of Deposits by paying Less interest rate and in turn uses the amount for Issuing loans for higher Interest rates usually more than the Deposit rates.Loans are important since they form major part of banking business

2.Monetary Size and Average Size :

Loans Cover substantially by more than 50% of Total Assets of Banks.If Bank has more loans it is considered as Largest bank since Loans are treated as Bank Turnover and average Size is taken to represent the Loans amount not only from 1 bank but from all 3 Banks.

3. Risks Involved:

There is risk that borrower may default the Loan amount And Loan becomes Non Performing therefore Bank has to assess the Credibility of borrower before issuing loans and there after Steps shall be taken for recovery of Amoint regularly from the borrower

4. Methods Used to Hedge the Risks Relating to Loans:

Interest rate swaps and other hedging strategies have long provided a way for parties to help manage the potential impact on their loan portfolios of changes occurring in the interest rate environment. A standard interest rate swap is a contract between two parties to exchange a stream of cash flows according to pre-set terms. In essence, the transaction involves trading costs associated with two different types of loans—typically swapping the terms of a floating rate loan for those of a fixed rate loan or vice versa.

Borrowers may have specific objectives when choosing to participate in an interest rate swap or related hedging strategy. For example, the goal may be to reduce interest expense on a particular loan by swapping a higher fixed rate for a lower floating rate. Alternatively, a borrower may wish to hedge existing interest rate risk related to the potential that rates will move higher in the future. This is accomplished by swapping the terms of an existing variable rate loan for those of a fixed rate loan that will lock in the interest rate on a loan for the loan duration.

An important distinction of an interest rate swap compared to other types of financial transactions is that principal is never exchanged. The swap represents an agreement to exchange interest cash flows over time. Interest rate swaps are completely customizable with flexible terms. The contract is legally separate from the hedged item, and no upfront premium is required to execute a swap.

5. Income Generated from Loans:

Since Income generated from loans is Interest Income which is Major part of Total Bank Income.

Interest Income From Loans Shall be always more than the Income Generated from Other Assets( For Example Dividend on Investments)