Friday, May 1, 2009

high loan-deposit Ratios in New York and Chicago(2)

This considerable decline in liquidity of the portfolio, because of an aggressive search for higher bank profits,was in contrast with earlier traditional ideas held by banks concerning portfolio management. It was formerly thought that if banks increased their holdings of risk assets, i.e.,loans,they were also expected to increase their holdings of cash (primary reserves)and low-risk, low-yielding assets,such as U.S. government securities of short maturities (secondary reserves)in order to preserve their liquidity. There were,then,three major considerations that were expected to govern prudent portfolio management: (1)liquidity,(2)asset quality,and(3)income. These three objectives might also be condensed into the two opposed objectives of maximum profits and maximum safety. The latter two objectives are clearly opposed ,because the asset giving the greatest return is ordinarily the one with the greatest risk of default,whereas the safest asset is usually one yielding a low rate of return.Using the threefold classification of objectives,let us now consider liquidity.

No comments: