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A bank with a history of callbacks may have a hard

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A bank with a history of callbacks may have a hard time attracting the best borrowers. Callback: when a bank reserves the right to demand that a loan be repaid in its entirety at any time. As we have shown, excess reserves provide a cushion for deposit outflows. A lack of excess reserves (deficient reserves) can be costly in terms of lost revenue and lost goodwill. Excess reserves act as insurance against the costs of deposit outflows. An important task of banking management is to establish and maintain an adequate level of excess reserves. Asset Management Another important concern for bank managers is maintaining the quality of the bank’s assets, especially loans and securities. The goals are to seek assets with high returns, low risk, and sufficient liquidity. Obviously, these goals are not always compatible, so banks must often practice a balancing act between competing interests. In the background there are always the concerns of regulators to consider, and the problems of moral hazard and adverse selection lurking in the shadows. Techniques of asset management Some common techniques of asset management include: 96
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Econ 350 U.S. Financial Systems, Markets and Institutions Class 10 1. Marketing of loans – find safe borrowers who are willing to pay high interest rates. Banks can accomplish this through advertising and solicitations, or using other tools to avoid adverse selection such as having fancy, ornate buildings with well-dressed bankers. Banks may support community activities to improve public relations. In Class 8, we discussed ways that banks try to avoid the adverse selection problem. 2. Purchase securities with high return and low risk – Examples might include long- term Treasury Bonds or negotiable CDs issued by other banks or credit unions. 3. Diversification – of assets, loans and securities to reduce risk. 4. Asset-liability management – match the maturities of assets and liabilities as closely as possible, so that assets are liquid enough to meet reserve requirements, and the needs for liability financing over time are met by revenue earned from the maturing of assets. For example, at Alternatives Federal Credit Union, we are constantly trying to develop new loan products, such as refinancing automobile loans or 100% home equity loans. These new loan products both help to diversify our assets, and provide important loan services to the potentially unbanked in our community. Liability Management Before the 1960s, there would not have been much to write about in terms of liability management. Most liabilities were either checking accounts (60%), which by law paid no interest, or savings accounts that paid a fixed interest rate determined by a law known as regulation Q. There wasn’t much variation in liabilities to manage.
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