Banks are financial intermediaries with a traditional focus on taking deposits and lending money. As such, they are taxable investors with predominantly short- and intermediate-term liabilities.

Although we can view a bank's strategic asset allocation from the perspective of all bank assets including loans, real estate (including bank premises) and so forth, a bank's securities portfolio is subject to a distinct set of regulations and is traditionally treated separately.

Asset allocation for Banks

Bank's securities portfolio plays an important role in (1) managing the balance sheet's overall interest rate risk, (2) managing liquidity (assuring adequate cash is available to meet liabilities), (3) producing income, and (4) managing credit risk. The first concern is the most important and dictates an ALM approach to asset allocation. Banks' portfolios of loans and leases are generally not very liquid and may carry substantial credit risk. Therefore, a bank's securities portfolio plays a balancing role in providing a ready source of liquidity and in offsetting loan-portfolio credit risk.

As with the portfolios of insurers, public policy usually views bank portfolios as quasi- public trust funds. Thus banks typically face detailed regulatory restrictions on maximum holdings of asset types, often stated as a percentage of capital. In turn, the risk of assets affects banks' costs through the operation of risk-based capital rules ( types of reinsurance ).

EXAMPLE 5-20 An Asset Allocation for a Commercial Bank

William Bank is a hypothetical U.S. commercial bank. Although a more detailed breakdown of asset classes would be more realistic, the asset allocation presented below shows the typical emphasis on high-credit-quality debt instruments. The target percentages are stated as a percentage of the securities portfolio, for consistency with the presentation elsewhere, but regulatory guidelines are as a percentage of capital (capital stock and surplus plus undivided profits).

Investment Portfolio Asset Type

Target

Regulatory Guideline

U.S. Treasury bonds

10%

No limitation

Agency obligations

65

No limitation

Tax-exempt general obligations

3

No limitation

Tax-exempt other

5

<4% of capital, > Baa/BBB

Corporate bonds

12

< 10% of capital, > Baa/BBB

Money-market preferred stock

5

< 15% of capital

 

Add comment


Security code
Refresh

Markets

Loading
Chart
o Microsoft 46.13 ▲1.11 (2.47%)
o Google 539.78 ▼4.20 (-0.77%)
o BRE 0.00 (%)
o Yahoo 43.50 ▲0.90 (2.11%)
NASDAQ:MSFT

Microsoft

Company ID [NASDAQ:MSFT] Last trade:46.13 Trade time:4:00PM EDT Value change:▲1.11 (2.47%)
NASDAQ:GOOG

Google

Company ID [NASDAQ:GOOG] Last trade:539.78 Trade time:4:00PM EDT Value change:▼4.20 (-0.77%)
NYSE:BRE

BRE

Company ID [NYSE:BRE] Last trade:0.00 Trade time: Value change: (%)
NASDAQ:YHOO

Yahoo

Company ID [NASDAQ:YHOO] Last trade:43.50 Trade time:4:00PM EDT Value change:▲0.90 (2.11%)

Capital Market Expectations:

CAPITAL MARKET EXPECTATION TOOLS. Survey

The survey method of expectations setting involves asking a group of experts for their expectations and using the responses in capital market formulation. If the group queried and providing responses is fairly stable, the analyst in effect has a panel of experts and the approach can be called a panel me...

Tuesday, 17 May 2011

Fixed Income Manager:

Emerging Market Debt

Emerging markets comprise those nations whose economies are considered to be developing and are usually taken to include Latin America, Eastern Europe, Africa, Russia, the Middle East, and Asia excluding Japan. Emerging market debt (EMD) includes sovereign bonds (bonds issued by a national government) as well as debt securities issued ...

Friday, 20 May 2011

Alternative Investment:

Real Estate Market. Types of Real Estate

As one of the earliest of the traditional alternative investments, real estate plays an important role in institutional and individual investor portfolios internationally. The focus of our discussion is equity investments in real estate (covered in the definition given earlier)....

Wednesday, 25 May 2011

Equity Manager:

Long-Short Portfolio

Whereas style investing is concerned with portfolio characteristics (low P/E, high earnings growth, etc.), long—short investing focuses on a constraint. Essentially, many investors face an investment policy and/or regulatory constraint against selling short stocks. Indeed, the constraint is so common and pervasive that many investors do not even recognize it ...

Tuesday, 24 May 2011