Question
You are a manager for a commercial bank and are contemplating shifting a large portion of your primary and secondary reserves into investments and loans.
You are a manager for a commercial bank and are contemplating shifting a large portion of your primary and secondary reserves into investments and loans.
a. Briefly discuss the advantages and disadvantages of such a strategy.
b. After weighing the advantages and disadvantages, you decide to make the shift. A few months later you are faced with an unexpected need for liquidity. You could sell some investments but prefer not to since interest rates have risen and you would be forced to accept a lower price. Where else might you find the needed liquidity?
c. If you managed a life insurance company instead of a commercial bank, would you be more or less concerned with managing liquidity? Explain.
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