Q 1. GENERAL PRINCIPLES OF BANK MANAGEMENT
The general principles of bank management include;
Liquidity management- involves maintaining asset that can be easily converted into cash. The cash serves the purpose of depositor withdrawal either from checking or savings account or checks written by the depositor to other banks. Liquidity management make sure cash is available upon depositors demand to withdraw or payment.
To keep enough cash on hand, the bank must engage in liquidity management practices. A bank needs to hold enough excess reserves that can be able to meet all depositors need. This shield the bank from additional cost in meeting the depositors need. Such additional costs include the cost of borrowing from other banks, sale of securities, calling in loans and resulting in borrowing from federal bank.
Asset management; a bank need to manage its asset is effectively so as to maximize its profits. This can mainly done through, acquiring liquid assets that have acceptable low level of risk such government securities, diversifying its asset holding portfolio as risk asset management strategy, issuing loans yielding higher interest to borrowers who are deemed safe, last the bank s meet to maintain enough reserve to meet its depositors need without resulting to borrowing in order to save on cost of borrowing.
Liability management with the increased innovation and changes in operation of banks operation a banks need to ensure the cost of funds is minimized. This ensures a bank will be able to meet its obligation as the fall due.
Capital adequacy management-the manager must decide the amount of capital the bank should maintain and then acquire the needed capital in consideration of the regulation existing in the market. Capital is essential in bank as is prevents failures and also influence returns on common stock holders.
Q . 2 Discuss the techniques of managing credit risk and interest rates risk
There are various techniques used by banks to manage credit risk they include,
Prescreening and loan monitoring
Banks usually collects information pertaining to their prospective clients. The information collects helps to evaluate the borrowers classify the borrower either as safe borrower or risky borrower in this event the bank is able to manage the credit risk
Another way is continuously monitor the borrower after the lender have issued loan, this help to solve the problem of moral hazard where the borrower under take more risky venture than the one the money was borrowed for.
The second manage credit risk establishment of the long customer relationship this helps the banks to collect information about the borrower asses the overall credit worthiness of the borrower.
Third the bank can manage the credit risk by placing stringent condition on the use of the borrowed funds. In this case the bank issues restrictive covenants that restrict the borrower from engaging in risky activities.
Fourth a bank need to ask for collateral, in which it would recover the money in the event the borrower fail to repay the amount borrowed.
Fifth another credit management tool is credit rationing. In this case the bank refuses to lend the borrower funds even if they are willing and able to pay high level of interest rates.
Now let us turn our interest to measure to manage the interest rate risk, interest rates are very volatile therefore the bank needs to appropriately hedge against loss emanating from the changes interest rates. Therefore, the bank needs to undertake a gap and duration analysis, in this case sensitivity of profits to interests, where the liabilities which are sensitive to changes in the rate interest are subtracted to from assets that are responsive to changes in the rate of interest in gap analysis.
Q 3. Discuss the off-balance sheet activities...