Bank investment objective

[FrankCFA]

Is below statement correct? (Kaplan question)
Bank investment portfolios typically put primary focus on enhancing spread earnings and providing liquidity.
Answer: False
Question: Is below priority correct? Thanks.
1. Liquidity
2. Manage the securities portfolio to balance overall asset risk exposures with liabilities
3. Enhancing spread earnings

 

[Galli]

Banks don’t provide liquidity so I would have said false. They definitely NEED liquidity though.
They do try and ehnace the spread they earn on their liability - asset balalnces.

 

[broadex]

My guess - is first priority is “Manage the securities portfolio to balance overall asset risk exposures with liabilities”. main task for the bank is ALM.

 

[zulu007]

CFAI text lists objectives of bank’s securities portfolio as:
1. Manage overall interest rate risk of B/S
2. Liquidity
3. Produce income

 

[Tommy83]

Galli wrote:
Banks don’t provide liquidity so I would have said false. They definitely NEED liquidity though.

You’re 110% right about needing liquidity, but I’d be careful about answering an essay question saying banks don’t provide liquidity. I think I know what you mean b/c he was talking about investment portfolios, but a major part of a bank’s loan portfolio is collateral based lending, or providing funds/liquidity to clients based on values of less liquid assets. An economy is in big trouble if banks aren’t providing liquidity. The credit crisis of 2007-2009 was largely based on banks not providing liquidity to the economy that needed it, which largely was a function of them not having liquidity as you correctly mentioned.

 

[Galli]

That’s true. I think my interruptation of liquidity (there when you absolutely need it most) is different than the text book.