Investment Objectives and Constraints for Banks
Banks face a mismatch between assets and liabilities that strongly influences investment policy. Typically, banks receive deposits that are short-term in nature but lend funds on a long-term basis (i.e. mortgages.)
Risk objective
Managing the asset/liability mismatch is a primary concern that results in below average tolerance of risk.
Return objective
Earn a positive spread over the rates paid to depositors.
Constraints
Liquidity needs are significant, both to cover net depositor withdrawals and to facilitate lending. In order to balance the asset/liquidity management, interest rate risk and return requirements the time horizon tends to be intermediate-term in nature. Portfolios are fully taxable, and there are legal and regulatory restrictions on the amounts that can be invested in equities or non-investment grade bonds.
For more information, see all articles on: FInancial Planning, Institutional Investing, Portfolio Management See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
