Discuss how banks make money, and are structured in respect to Asset, Liability and Capital Management.

2 hw | Business & Finance homework help

Banks make money primarily by taking in deposits from customers and lending that money out at higher interest rates than what they pay for the deposits. In order to do this, banks must carefully manage their assets, liabilities and capital.

Asset management involves the use of appropriate loan policy to ensure that loans are secured or given out only with sufficient collateral and creditworthiness standards as well as asset diversification strategies to reduce risk. Liability management is focused on managing customer deposits such as certificates of deposit (CDs) and savings accounts; it also includes optimizing bank investments via treasury bonds, notes, mortgage-backed securities etc.
Capital Management ensures adequate liquidity levels are maintained at all times through methods such as retention of earnings, debt financing and equity financing. Additionally, capital adequacy ratios established by regulators need to be met while still extending enough loans with suitable terms so profit can be generated.