Commercial Banks – Liquidity vs Profitability

Banks Liquidity

Commercial banks are profit seeking organizations. The way the commercial banks handle their portfolio is how the profits are reflected in their books. Portfolio management is basically how the commercial banks handle their assets and liabilities. Portfolio management refers to the management of assets and liabilities in such a way that the profits are maximized. Though banks want to make profits but at the same time they are concerned about liquidity and safety. In fact these three namely liquidity, profitability and safety are the main objectives of a monetary policy.

Banks have to earn profits because if they don’t, they would not work as all the shareholders would sell off the shares if proper dividends are not earned. Hence they have to earn profits for their shareholders and at the same time satisfy the withdrawal needs of its customers. The main problem here comes is sticking the balance between liquidity and profitability as both contradict each other. This is the trade-off between liquidity and profitability.

Maximum safety or in simple language we can say liquidity can be attained only if the banks keep high amount of cash against the deposits they have held. But if they do this, this will not bring any profits for the banks. Thus, if the bank goes for maximum safety then they will have to sacrifice the profitability objective that is the dividends would be as per the requirements of the shareholders. Similarly if they go other way round that is they only keep on investing and trying to increase the profitability factor than they will have the problem if customer demands for cash. Hence it is very difficult for the banks to reconcile the twin objective of bringing the profitability factor and liquidity factor go hand in hand.
Banks Liquidity
Trade-Off Between Liquidity And Profitability
A good banker should hence try to reconcile the twin conflicting objectives by actually working on a good portfolio management. This can be also done by analyzing the situation, studying the objectives and therefore choosing the diversified and balanced asset portfolio. But the problem with the banks these days are that they are not taking these issues that seriously as seriously it should have been taken into consideration. It is not a lay man job to analyze these situation and work on the same. Banks need high level managers who actually hold a degree in such a field and have a good experience of the same. Such managers can actually understand these situations and react on it. And if these all things are possible then the large investors can actually earn a good trust on these banks.

Definitely how much ever one tries to hold such balance, the financial sector has to one day, face the downs with the ups. It was once said that the banks are very difficult to face any kind of problems ever. But they saw. They had to. Public was actually mollified when most of the banks paid them via bailouts. This was only possible because of the Occupy protest which took place in 2010. Still people complain about the banks which in any other case would actually happen. People argue, fight, complaint, protests via internet, bulletins and media every day.

These days something new is coming up. They have actually started a new way of protesting with the picket signs- silence. Big investors have now started putting their money into new big and innovative ventures. This is actually gaining popularity among them. And one by one all these big shots have stated with this new thing which is now taking a turn as a new fashion among them and one by one all of them are jumping into the pond and competing among themselves. And to be frank the biggest amongst these is swimming somewhere else only.
The problem here is been faced by the banks as on one hand the investors are diminishing and on the other, regulations on them are increasing. So both the combine effect is bringing a horrible sight for the banks and hence they are struggling to put at least one on the safe side but things are not working out.  But the banks are not going to be quite. They are struggling and trying to balance the situation coming out with different plans each day, calling up the old clients and giving them knowledge about the new plans and investments and the future return and on the same time fighting with the regulations as the lower the rules by applying to the government by asking a grant of relief for at least few of the strict rules or at least lowering the regulations. Banks are also reaching out to the investors who have already jumped into property or other sort of ventures. It is very well seen that the lost investors are needed at a very high rate by the banks. As if the current situation continues then banks will be at a great loss.

Banks are not only facing problems with the investors but also with the shareholder and why not? If the banks don’t have a good liquidity and cannot fulfill the demand of the depositors then definitely slowly people will stop keeping deposits with these banks and seeing this shareholders will sell of the shares which will in fact reduce the share price of the bank and once the share prices are reduced then banks will earn less. So overall everything will be facing the problems.

Hence the only thing a bank can now do is strike out a balance between

  • Liquidity
  • Profitability

These two things can only fetch peace as of today. For this a bank needs professionals who can understand the situation, the history of the bank, the current situation, the need and so on. Not only this, the professionals so appointed should be aware of the rules and regulations and should know how to work within them. Hence under their guidelines things can come under control and banks would have a good asset portfolio which would bring back the old investors and again regain their market position.