The essential goal behind the decision making policies of a bank is to capitalize on the wealth of the bank’s shareholders. At times, there are some managers in the banks that make decisions that are in their own best interest as to oppose to the shareholders interest. For instance, decisions that affect the growth of the bank may be proposed to raise employees salaries, where as larger banks have the tendency to provide more employee compensation. Also, “the compensation to a bank’s loan officers may be linked to loan volume, which encourages a loan department to extend loans without concern about any risk.” (Madura, 2008) “As these examples suggest, banks can incur agency costs, or costs ...view middle of the document...
Every public company must have a board of directors
The term liquidity is often used in multiple circumstances. An asset’s liquidity can be used to describe how quickly, easily and costly it is to convert that asset into cash (Berger & Bouwman, 2008). Liquidity can also be utilized to describe a company by the sum of cash or close to cash assets a company has. The more liquid assets a company may have the higher liquidity. Liquidity risk is the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. If the bank is not able to pay its obligations it can lead the company to face serious financial issues. Additionally, liquidity risk can be as well be defined as the counterparty to a transaction. In this sense the term means the risk inherent in the fact that the counterparty may not be able to pay or settle the transaction even if they are in good financial standing, because of a lack of liquidity (Petria & Petria, 2009).
Interest rate risk is the distinction in time, credit, and rate between an asset and the liability used to fund the asset. In the case of a bank, the primary legal responsibility is its deposit base, the certificates of deposits it distributes and savings accounts, along with other items. Certificates of deposit and savings accounts are interest-rate delicate items for which the bank must be equipped to offer competitive rates. The deposit pool is a function of the magnitude of the depository. Banks are frequently regulating the most favorable number of outstanding liabilities and the maturity structure based on the amount of new loans approved every day. The issue of what structure the maturity of liabilities is absolutely important because the bank has to be prepared for direct line of credit commitments. These are contracts that banks hold not only with...
