Question

(a) Explain the following bank management activities: liquidity management, asset management, liquidity management, capital adequacy management, credit risk management, interest-rate risk management.

        Consider the Loan Shark Bank (LSB) with the balance sheet shown below, which is subject to a 10 percent required reserves ratio. Use this information to answer parts (b) and (c).

Assets	Liabilities
Reserves                       $20	Deposits                                  $100
Loans                            $80	Loans from Comm. Banks $ 10
Securities                      $30	Loans from the Fed                 $ 10
	Bank Capital                            $ 10

(b) Given the information about LSB, consider the following two transactions. First, John deposits $2 in LSB. Then, Juan withdraws $5 from his savings account at LSB. Use a T-account to represent the changes in the LSB balance sheet from each transaction—that is, you need to show two T-accounts. Then, show LSB balance sheet after both transactions have taken place.

(c) Given the information about LSB—discard the transactions from part (b)—, could LSB remain in business if it suffers a 10 percent loss in its securities? Explain your answer and show the resulting LSB balance sheet if this scenario occurs.

Answer 1

(a) Liquidity Management : Liquidity Management means the immediate availability of funds by the banks to meet its financial requirement. This also includes funds other than cash who have the capacity to be converted into cash.For maintaining liquidity, banks have to keep CRR(cash requirement ratio) with the RBI although this is not justified for proper liquidity. For liquidity management one has to keep following points in the mind:

• Banks have to arranges for the sources form where is can generate immediate cash.
• Banks should invests in different funds so that it will be easy to generate cash from any of the sources easily.
• Banks should invest and manage funds keeping in mind the future plans.

(2) Assets Management : Assets Management in simple terms means the managing the assets. It means that the banks should be able to manage its client's funds to generate maximum return. Banks should properly manage the funds for which it can invests in equity, mutual funds, etc

(3) Capital Adequacy Management : Capital Adequacy management means the capital required to be kept with the banks. For controlling this central bank introduce Capital adequacy ratio(CAR) to check whether the banks should not take excess leverage.

CAR= Capital weighted assets/risk weighted assets

(b) John deposits $2

Liabilities Amount Assets Amount

Deposits 2

Bank -2

Juan withdraws $5

Liabilities Amount Assets Amount

Deposits -5

Bank 5

(c)

Yes it will remain in business after 10% loss in its securities.