Question

Assess the importance of the bank investment function in the context of the bank objectives and comment on the instrument selection process instituted by a bank ( feel free to make assumptions if necessary)

Answer 1

The primary function of banks are to transfer financial resources from who have to who need. The needs may be various. It can be to start a company or to buy a house. Economy operates because of fund movement from one resource to another. Banks aid this movement to ensure smooth operation of economy.

Thus the primary objectives of banks maybe twofold:
a) Business objectives: they are aimed at generating profit for the bank by looking at it as a financial intermediary with a profit making objective. Thus the activities done are focused on
1. Profit making
2. Provision of financial services with an objective of receiving a fee
3. Providing currency
4. Act as financial intermediary by taking deposits and dispersing them to the loan requirers
5. Providing products and services to ensure both domestic and international trade and commerce

b) Social objective: aims at helping the community at large by by providing economic development and growth through:
1. Help create a culture of saving instead of consumption
2. Encourage entrepreneurs by providing capital
3. Provide employment
4. Provide safety for financial assets
5. Provide financial knowledge and advisory through penetration of financial services

The instruments used by banks for their assets and liability matching is done after analysis of they cash flows and future outlook. Multiple factor contribute to this including:

1. Asset and liability duration

2. Current and future interest rate outlook

3. Economic development outlook

4. Government or regulatory restrictions

5. Future growth prospects