Banking and the Management of Financial Institutions - General Principles of Bank Management

5 important questions on Banking and the Management of Financial Institutions - General Principles of Bank Management

What are the 4 primary concerns when managing a bank?

1. Liquidity management (holding enough cash)
2. Asset Management (acquiring assets that have low have low rate of default by diversifying asset holdings)
3. Liability management (acquiring funds at low cost)
4. Capital adequacy management (decide the amount of capital the bank should maintain)

What is Credit Risk?

The risk arising because borrowers may default

What is Interest-rate Risk?

The riskiness of earnings and returns on bank assets caused by interest-rate changes.
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What are the 4 tools to maximize profit?

1. Find borrowers who will pay high interest rates and have low possibility of defaulting.
2. Purchase securities with high returns and low risk.
3. Lower risk by diversifying.
4. Balance need for liquidity against increased returns from less liquid assets.

What happened after 1960?

- Large banks in key financial centers began to explore ways to get reserves and liabilities
- Expansion of overnight loan markets and new financial instruments
- Checkable deposits have decreased in importance as source of bank funds

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