Explain the following bank management activities: liquidity management, asset management, capital adequacy management, credit risk management, interest-rate risk management.
Banks are evaluated on their liquidity, or their ability to meet collateral obligations and cash without incurring substantial losses. Liquidity management simply refers to the ability of a bank where it meets the financial obligations as they come due. This can come from direct cash holdings in currency or on account at the Federal Reserve or another central bank. In most of the cases, it comes from acquiring securities that can be sold quickly with minimal loss. Liquidity management describes the efforts of investors and managers to reduce liquidity risk exposure. This basically states highly creditworthy securities, comprising of government bills, which have short term maturities.
If their maturity is short enough, the bank may simply wait for them to return the principal at maturity level. For short term, very safe securities favor trading in liquid markets, stating that large volumes can be sold without moving prices too much and with low transaction costs.
Asset Management, on the other hand, is a team within a financial firm that is dedicated to managing the assets (investments, cash, etc.) of clients. The asset management firm includes dedicated portfolio managers that work efficiently. It also provides access to internal, detailed equity research reports which should give it an edge over investors controlling their own money.
It invests its clients’ funds in derivatives, equities, securities, commodities, currencies, etc., to grow these investments. It chooses investment vehicles based on clients’ requirements and attitude to risk further.