ECON 161A Lecture Notes - Lecture 8: Asset Management
Document Summary
Max. return on asset"s subject to risk and liquidity considerations. Banks require a portfolio of interest baring assets and make decisions on how risky they want that portfolio to be and how liquid they want it to be (do we want to hold t-bills that are easier to sell?) How to manage assets, banks : originate and manage loans (they make new assets and contracts that weren"t in existence before; you walk in and you and the bank negotiate to create a deal into a new loan contract) Screen borrowers (the quality of a bond is determined by a credit rating party, a third party. With a loan or mortgage, the bank is screening the credit worthiness of the borrower and writing contracts) Why banks do a lot of lending is because banks specialize in these additional interest bearing opportunities instead of just holding securities: diversification.
