1. Interest rate cycles can have a large influence in our economy, policies, and employment.” The global financial crisis and recession brought interest rates in most countries to their lowest levels. The goal is to use a low interest rate policy to flush money into the economy and hope that such money will help stimulate by increasing consumer spending and reducing costs of capital for producers (1)”.
2. The ultimate goal of any firm including a bank is to maximize shareholder’s wealth. In order to do so many risks must be properly managed to avoid any adversity. ...view middle of the document...
Credit insurance and credit derivatives “allow users to manage their exposure to credit risk. Credit derivatives are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of economic agents (private investors or governments) (2)”.
3. “Optimum liquidity is achieved by balancing risks and returns. To be more specific, measures of liquidity need to be high enough to meet even unexpected changes in liquidity needs and sources (p.329).” A bank’s concern of having liquidity or the ability to convert an asset without a decrease in the price is important in the banking industry. In order to achieve such liquidity there are several things that can be evaluated such as:
• The available assets easily convertible into cash.
• The volatility of deposits.
• The reliance of money market instruments and interest sensitive funds.
• The ability to adjust rates on loans when rates on interest sensitive sources of funds fluctuate.
3. Gup, E. Benton. Kolari, James W. Commercial Banking. The Management of Risk. 3rd Edition. 2005