money, bankingExplain how a bank uses liability management to respond to a deposit outflow. Why do banks prefer liability management to asset management?

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belarafon's profile pic

belarafon | High School Teacher | (Level 2) Educator Emeritus

Posted on

Without proper management of risk, it is possible for debt and other issues to pile up to the point where they threaten the financial integrity of the bank itself. Control of problems is always better than letting them wait; the proverbial "stitch in time" allows banks to assess the markets and economy and make better decisions.

accessteacher's profile pic

accessteacher | High School Teacher | (Level 3) Distinguished Educator

Posted on

Basically, this question reflects the way in which we are all, banks included, exposed to risk nowadays. Liability management is the way in which banks assess that risk and ensure that they are using their money and managing their debts effectively so that they do not become unprofitable institutions.

vangoghfan's profile pic

vangoghfan | College Teacher | (Level 2) Educator Emeritus

Posted on

The answer given by # 3 is easiest for me to understand, although all the answers are probably valuable.  A liability is basically a debt. It seems as important for a bank to manage its debts as for an individual. I am personally far less concerned about managing my assets than about managing (especially reducing) my debts. Here's a good discussion of this matter:

http://en.wikipedia.org/wiki/Asset_liability_management

lmetcalf's profile pic

lmetcalf | High School Teacher | (Level 3) Senior Educator

Posted on

Banks must always assess the liability they are exposed to so that they can make the most money from the money they have. Liability management is risk management, and banks must protect themselves from risk as much as possible and yet still make money for the "business" of the bank. A bank is ultimately out to make money not just hold onto the money it has, but to make money they must take risks.

rrteacher's profile pic

rrteacher | College Teacher | (Level 2) Educator Emeritus

Posted on

If it is in response to a deposit outflow, then liability management would take the form of selling CDs or other investments to raise much needed cash. It is all about balancing assets and liabilities in a way that maintains liquidity.

litteacher8's profile pic

litteacher8 | High School Teacher | (Level 3) Distinguished Educator

Posted on

You need to manage liability because it can be more destructive. An asset can't hurt, even if it loses value, as much as a liability can. So banks may tend to focus more on the liability management than the asset management in order to make their overall organizational strengths.
readerofbooks's profile pic

readerofbooks | College Teacher | (Level 2) Educator Emeritus

Posted on

If I am understanding your question properly, banks prefer liability management, because they want to be leveraged as much as possible. In other word, they usually want to max out their money with the hope of making as much as possible. In short, we can say that banks in the past and even now like risk (liability) for the sake of gain.

ranger1980's profile pic

ranger1980 | Student, Undergraduate | (Level 1) Valedictorian

Posted on

If it is in response to a deposit outflow, then liability management would take the form of selling CDs or other investments to raise much needed cash. It is all about balancing assets and liabilities in a way that maintains liquidity.

Againg you got the right answer. Thanks for you you help. You should Teach Business. You would be a great Professor in that field.   

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