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 …show more content…
makes earnings less sensitive to interest rate exposure;
2. allows an improvement in liquidity investment by meeting customer demands quickly;
3. decreasing the capital requirement to the minimum level for derivative investment.
Banc One’s Assets and Liabilities
It is the responsibility of Banc One’s chief investment officer, Dick Lodge to in charge of the company’s portfolio of balancing assets. He and his staffs spent most of the time in asset and liability management activities, measured the degree to which the the debit side and credit side of balance sheet were matched and made decisions on profitable investment in line with the bank’s policies of interest rate exposure management. Basically, they had four basic mandatory rules:
1) invest funds in conventional investments and derivatives to conserve the funds’ principal value yet provide a reasonable rate of return;
2) ensure the company with sufficient liquid investments in order to meet an unexpected demands for cash;
3) control Banc One’s reported earning sensitivity to flunctuations in interest rates;
4) achieve all the tasks above without the bank’s capital …show more content…
For example, if the company wished to hold a larger amount of fixed-rate investments, it could either sell its existing floating-return investment or borrow funds at floating rate and then use the proceeds to purchase the fixed-return Treasury note. This would cancel out the initial cash inflow and initial cash outflow and thus the net effects of these two transactions equal to zero, but the transactions indeed increase the relative proportion of Banc One’s fixed-rate portfolio. Besides, Banc One could use derivatives by engaging in an interest rate swap: exchange the floating rate into fixed rate return. Similarily, the initial net cash flow of entering into such a swap would be zero and increase the relative size of the bank’s fixed-rate portfolios by a reduction in its periodic net floating-rate returns. Although the purchase/sell of securities and the interest rate swap give rise to similar interest rate risks, the comany still had to analyze these two alternatives by some other characteristcs, for exanple: yield, capital requirements, relative transaction costs, liquidity and credit
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 …show more content…
makes earnings less sensitive to interest rate exposure;
2. allows an improvement in liquidity investment by meeting customer demands quickly;
3. decreasing the capital requirement to the minimum level for derivative investment.
Banc One’s Assets and Liabilities
It is the responsibility of Banc One’s chief investment officer, Dick Lodge to in charge of the company’s portfolio of balancing assets. He and his staffs spent most of the time in asset and liability management activities, measured the degree to which the the debit side and credit side of balance sheet were matched and made decisions on profitable investment in line with the bank’s policies of interest rate exposure management. Basically, they had four basic mandatory rules:
1) invest funds in conventional investments and derivatives to conserve the funds’ principal value yet provide a reasonable rate of return;
2) ensure the company with sufficient liquid investments in order to meet an unexpected demands for cash;
3) control Banc One’s reported earning sensitivity to flunctuations in interest rates;
4) achieve all the tasks above without the bank’s capital …show more content…
For example, if the company wished to hold a larger amount of fixed-rate investments, it could either sell its existing floating-return investment or borrow funds at floating rate and then use the proceeds to purchase the fixed-return Treasury note. This would cancel out the initial cash inflow and initial cash outflow and thus the net effects of these two transactions equal to zero, but the transactions indeed increase the relative proportion of Banc One’s fixed-rate portfolio. Besides, Banc One could use derivatives by engaging in an interest rate swap: exchange the floating rate into fixed rate return. Similarily, the initial net cash flow of entering into such a swap would be zero and increase the relative size of the bank’s fixed-rate portfolios by a reduction in its periodic net floating-rate returns. Although the purchase/sell of securities and the interest rate swap give rise to similar interest rate risks, the comany still had to analyze these two alternatives by some other characteristcs, for exanple: yield, capital requirements, relative transaction costs, liquidity and credit