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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.