Asset
management is the practice of increasing total wealth over time by acquiring, maintaining,
and trading investments that have the potential to grow in value. It is a
practice meant to improve wealth over time by acquiring, maintaining, and
trading investments that can potentially grow in value.
Like
every other business, the prime motive for commercial banks lies in profit
through the mobilization of existing of asset management. Banks extend loans
and buy securities to increase their profits as the loans and securities will
help them earn interest payments, increasing their earnings.
However,
another goal for commercial banks is safety. Safety depends on the liquidity of
the banks. The higher the liquid assets (cash and excess reserves), the
stronger the security of the banks because it assures the public that the
banking system is steady. There is no need for panic withdrawals.
To
maintain higher liquidity, banks will have to minimize the loans and purchase
of securities which will sacrifice their profit.
Deposits
and withdrawals are not the goals of commercial banks. Also, both the processes
go hand-in-hand. If deposits decline, it automatically means a decrease in
withdrawals. Similarly, assets and liabilities also move together. An increase
in assets implies a decline in the bank's liabilities as the two are seen in
relative terms to each other.
Banks
have to make decisions on which proportion of these assets described above to
choose to make profits and maintain liquidity. They do not have free choice,
because a great part of their liabilities is controlled by Bangladesh Bank. On
the other hand, if one bank gets into difficulties, other banks will help it,
because the collapse of one bank will affect the trust of all the banking
system.
From
the essay, it seems that it is quite hard to reconcile profitability and
liquidity as part of asset management. It requires many predictions, but
looking at the banks' buildings and the wealth of bank managers, it seems that
they are managing very well.
Therefore,
liquidity and profitability of asset management are two contradictory goals for
commercial banks