Aaaa Essay

1192 words - 5 pages


ID 3-08-14-025
BATCH - 14



General Principles of Bank Management

A Bank manages its assets and liabilities in four ways.

1. Asset Management
2. Liquidity Management
3. Capital Adequacy Management
4. Liability Management

1. Asset Management

Asset management is to acquiring assets with the highest return and the lowest risk. To maximize its profits, a bank must simultaneously seek the highest returns possible on loans and securities, reduce ...view middle of the document...

The bank must manage the liquidity of its assets so that it can satisfy its reserve requirements without bearing huge costs. This means that it will hold liquid securities even if they earn a somewhat lower return than other assets. The bank must decide, for example, how much in excess reserves must be held to avoid costs from a deposit outflow.

2. Liquidity Management

Liquidity management is making sure that the bank has enough cash to cover deposit outflows (hold some excess reserves, even though they do not pay interest). To keep enough cash on hand, the bank manager must engage in liquidity management. Checkable deposits are a bank’s lowest-cost source of funds. But checkable deposits are unlikely to provide a bank with all of the funds that it needs. Thus, the bank may obtain additional funds at higher costs by issuing CDs or by borrowing from other banks or non-bank corporations (repurchase agreements).

1 Borrow reserves as a discount loan from the Federal Reserve, borrow from another bank in the federal funds market, or borrow from a non-bank corporation by entering into a repurchase agreement.
2 Sell securities.
3 Reduce its loans

3. Capital Adequacy Management.

Capital Adequacy Management is maintaining the appropriate net worth to meet federal regulations and prevent bank failure. To maintain and acquire capital, the bank manager engages in capital adequacy management. Maintaining sufficient capital as a cushion against a decline in the value of the bank’s assets, while still providing a decent return to the bank’s shareholders.

4. Liability Management

Liability management is acquiring funds at the lowest cost. To increase profits by acquiring funds at low cost, the bank manager engages in liability management. Checkable deposits are a bank’s lowest-cost source of funds. But checkable deposits are unlikely to provide a bank with all of the funds that it needs. Thus, the bank may obtain additional funds at higher costs by issuing CDs or by borrowing from other banks (federal funds) or non-bank corporations (repurchase agreements).

Assignment – 2

Loan Classification

A loan is an amount of money that's given from one person (the lender) to another person (the borrower) with an expectation of repayment with interest. Loans are a type of debt.

Any bank loan that is in danger of default and have unpaid interest and principal outstanding, and it is unclear whether the bank will be able to recoup the loan proceeds from the borrower is called a classified loan.

The five categories used to classify a financial institution’s loan are as follows:
Pass, Special Mention, Substandard, Doubtful and Loss.


All of the following:

- Loan repayments current or not more than 30 days in arrears.
- Financial condition of the borrower is sound.
- Adequate credit documentation to...

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