Question

help with 1 and 2 please

1 Normal 1 No Spac... Heading 1 Heading 2 Paragraph Styles FIN 370 Section VIII: Risk Management Exercises Part A SARAH 1. Liquidity management can be practiced on either side of the balance sheet. How are asset and liability management similar? Different? Why do smaller banks have limited access to liability management? 2. Distinguish between credit risk of individual loans and the credit risk of loan portfolios. How are they related? 3. How do banks decide on the proper amount of primary and secondary reserves to hold? 4. Describe how credit default swaps can be used to manage credit risk exposure. Why do banks use these? 5. Assume the following balance sheet for All Star Bank. What does the balance sheet look like if a customer decides to exercise a $15MM loan commitment if the bank meets the borrowing need A) by "buying" (borrowing) liquidity and B) by using internal funds? Base Case

Answer 1

Answer1.Asset and liability liquidity management  is the practice of managing financial and liquidity risks that arise due to mismatches between the assets and liabilities as part of an investment strategy in financial accounting. It is not different but same in financial sense though the method of managing the assets and liabilities may differ but the intention behind both is the same. The goal of either technique is the minimum liquidity that will keep the bank operational and compliant with regulations. Asset management emphasizes differing liquidity characteristics of various bank assets. Liability management emphasizes the money market as a tool for borrowing liquidity as needed. Large banks are more able to consider liability management because they may tap the money market more easily. Small banks may not be able to tap money market easily as large banks can, hence small banks have limited access to liability management.

Answer 2. Loan portfolio credit risks refer to the risks of default of portfolio of loans as opposed to the risks of a single loan. The risk in portfolio of loans is less due to benefit of diversification as against the individual loan.