Friday, May 1, 2009

Bank portfolio Management and its Regulation

Banks can aggressively "buy" liabilities by offering higher rates of interest on time deposits or greater services to holders of demand deposits. the form of bank behavior, called"liability management," became of great importance in the banking industry in the 1960s and 1970s. Banks have traditionally had a great interest in managing their earning assets,i.e., the proper diversification of loans and investments, and this portfolio concern has continued to be evidenced along with liability management.
In general, in the period since World War II banks have changed their composition of assets from those consisting primarily of reserve and U.S. government securities to one consisting largely of loans to the private sector and increasing amounts of securities of state and local governments. At the same time that low-risk and low-yield asset have been reduced, banks have acquired more high-risk and yield assets.
The percentage of time deposits to demand deposits has also greatly increased in this period, reducing somewhat the risk of borrowing short and lending long, which was always a danger when demand deposits were much larger than time deposits. the great growth in time deposits by commercial banks has largely been accomplished by aggressive bank managements’ paying ever-higher interest rates on such deposits in order to avoid the dangers of disinter-mediation or nonintermediation in the face of rising money market yields. in turn, the higher costs of time deposits have increased the necessity of finding higher yielding earning assets.

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