Wednesday, July 22, 2009

the anticipated income theory

another theory of bank management of assets was developed in the 1950s in reaction to the apparent insufficient liquidity provided by the making of commercial loans and the holding of money market securities. using the doctrine of anticipated income,bankers again began to look at their loan portfolio as a source of liquidity. the anticipated income theory encouraged bankers to treat long-term loans as potential sources of liquidity.
How can a banker consider a mortgage loan as a source of liquidity when, typically, it has such a long maturity? Using the anticipated income theory, these loans are typically paid off by the borrower in a series of installments. Viewed in this way, the bank‘S loan portfolio provides the bank with continuous flow of funds that adds to the bank‘s liquidity. Moreover, even though the loans are long term, in a liquidity crisis the bank can sell the loans to obtain needed cash in secondary markets.
In a sense, mortgage loans (as well as consumer and business loans for some specified period of time ) are now considered to be equivalent to short-term business loans that finance inventories.Basically,the anticipated income theory is much like the commercial loan theory except that it embraces a broader base of securities from which liquidity may be obtained. That broader base now includes longer-maturity loans that contribute regularly to liquidity.

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