Asset And Liability Management : A Credit Side Of A Us Bank 's Balance Sheet

804 Words Oct 17th, 2016 4 Pages
Asset and Liability Management
A credit side of a US bank’s balance sheet typically included floating-rate liabilities and long-term fixed-rate liabilities, whereas debit side consisted of floating-rate assets and long-term fixed-rate assets. Generally speaking, asset and liability management required the banks to match the economic characteristics of its cash in and out and the strategic decisions relative to interest rate exposure required banks to match their assets to liabilities effectively. If the debit and credit side of balance sheet were perfectly matched, then whether an increase or decrease of interest rates woud have no impact on both sides of the balance sheet as the gains or losses are equally offset. Theoretically, interest rate changes would not affect a bank’s earnings or its market value in a perfect matching. However, a profit could be made if a bank make adjustments of its portfolio of assets and liabilities to interest rise or fall, but the profit is not guaranteed and losses could be made.

In reality, a bank’s position on long-term fixed-rate liabilities are usually bigger than the position on long-term fixed-rate assets. In order to eliminate the shortfall, banks trying to match their assets and liabilities by using balancing asset as a complementary to the loan portfolios, like Treasury bonds. Balancing asset conserve the fund’s principle amount and provide a reasonable return by investing in conventional securities. By choosing different kinds of…

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