The risk management is crucial to find appropriate solution.

Topic: BusinessComparative Analysis
Sample donated:
Last updated: December 30, 2019

 The asset andliability structure is important for banks in order to maximise profitability,increase effectiveness and stability and minimise risk. With a faulty structurethe banks may be in a vulnerable position when there are changes in interest rates,inflation, banking legislations and global economy. Asset/liabilitymanagement has become a complex endeavour. An understanding of thedifferent factors that take upon this aspect of risk management is crucial tofind appropriate solution. Careful asset allocation accounts not only for thegrowth of assets, but also specifically addresses the nature of anorganization’s liabilities.Macroeconomic conditions, sovereignand financial market tensions and monetary policies can change rapidly, asshown by the 2008 financial crisis, and it is important to ensure asset qualityand profitability in response to the changing environment.  In the case of commercial banks,they make their profits by taking small, short-term liquid deposits from saversand putting these into larger, longer maturity loans e.

g. mortgages or businessloans. But in order to minimise risk, banks have to diversify their assets,since they can’t put all their funds into long-term loans, as that would putthem into a weak position if the loans went bad. Thus, banks diversify theirassets, putting funds into long-term and short-term loans, offshore securities,gold, cash etc., and they effectively reduce risk, improve their liquidity, andin the situation that there is a market downturn they will have a better chanceof survival. Asfor investment and universal banks, they generally have more assets in trading,reverse repo finance and less in loans. The same distinction is on theliability side, where commercial banks tend to have mostly deposits, universaland investment banks typically have mostly repo finance, trading and otherdebt.

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