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Four Main Types of Financial Management for Commercial Banks

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Questions and Answers

What is the main aim of asset management for a commercial bank?

Minimizing the cost of funds
Increasing the required reserve ratio
Minimizing the deposit outflow
Maximizing the return on funds (correct)

What does liquidity management aim to ensure for a commercial bank?

Complete elimination of excess reserves
Zero reserves for maximum flexibility
Maximum profit generation
The ability to pay off liabilities in case of deposit outflow (correct)

What is the key factor in ensuring liquidity for a commercial bank?

Complete elimination of excess reserves
Zero reserves to maximize flexibility
Maximizing the required reserve ratio
Keeping part of deposits as liquid money (correct)

What is the purpose of liability management for a commercial bank?

Deciding a diversified portfolio of sources of fund (B) Signup and view all the answers

What is determined by the required reserve ratio for a commercial bank?

Required Reserves (D) Signup and view all the answers

What is further decided by the manager of a commercial bank in relation to liquidity management?

Excess Reserves Ratio (D) Signup and view all the answers

What is the formula for calculating excess reserves (ER)?

ER = excess reserve ratio (rE) * Deposits (D) (C) Signup and view all the answers

What is the primary concern of liquidity management in a bank?

Optimizing the amount of liquidity to be kept in the bank (D) Signup and view all the answers

What happens if a bank faces a liquidity shortage?

The bank's actual reserves are lower than the required reserves (B) Signup and view all the answers

What is the best solution for covering a liquidity shortage according to the text?

Selling securities (C) Signup and view all the answers

What does the required reserve ratio represent?

The percentage of current prevailing deposits in the bank that must be kept as required reserves (B) Signup and view all the answers

How is excess reserve ratio different from required reserve ratio?

Required reserve ratio is obligatory and is the same for all commercial banks, while excess reserve ratio is optional and could differ from one commercial bank to another (A) Signup and view all the answers

How does a deposit outflow affect a bank's balance sheet?

It leads to a shortage in the required reserves (B) Signup and view all the answers

What happens when a bank borrows from the central bank to cover a liquidity shortage?

The bank would pay the discount rate (A) Signup and view all the answers

What is considered as a worst solution for covering a liquidity shortage according to the text?

Borrowing from central Bank (A) Signup and view all the answers

What are considered as secondary reserves according to the text?

Securities (B) Signup and view all the answers

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