Tuesday, November 14, 2006

Investment Portfolio of Banks

Uses:Stabilize income, offset credit risk exposure in loan portfolio, provide geographic diversification, provide liquidity, reduce tax exposure, hedge against interest rate risk, collateral, flexibility in assets portfolio, and dress up to make it financially stronger.
Money Market (lesser than one year maturity) and Capital Instruments (more than one year maturity) are the two types of investments available for Banks.
Crossroads account - since they stand between cash, deposits, and loans. Increase investment when there is excess cash, decreased loan demand, lesser deposits and vice versa.
Investment securities held by banks FNMA, GNMA, FHLMC, municipals, Non-mortgage related asset backed securities.
Factors involved in choosing investments: Tax exposure, rate of return, interest rate risk, credit risk, business risk, liquidity risk, call risk, prepayment risk, inflation risk, and pledging requirements


Source: 'Bank Management and Financial Services'



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posted by Valli @ 9:54 AM

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