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BANK PORTFOLIO MANAGEMENT
WHAT IS BANK PORTFOLIO/PORTFOLIO MANAGEMENT
Portfolio refers to the collection of investments/securities that a bank applies its resources to for the purpose of generating income and maintaining liquidity. While liquidity focused portfolio such as cash, treasury bills, Central Bank certificates and other money market instruments are aimed at enabling banks meet unexpected net cash outflow, revenue focused portfolio is geared towards maximizing income accruable to a bank.
Bank Portfolio Management can be defined as an informed and conscious approach to minimize risks, boost profitability or returns while guaranteeing liquidity through diversification of the use to which funds available to a bank, as financed by liabilities, capital and reserves are put. Today banks look at their assets and liability portfolios as an integrated whole, considering how total portfolio contributes to optimal profitability that is in consonance with its risk acceptance criteria.
The basic tool in Bank Portfolio Management is Asset-Liability Management. Its purpose is to formulate strategies and take actions that shape a bank’s balance sheet as a whole in a way that contributes to its desired goals. Portfolio Management of a bank is indeed a balancing act between creation of risk assets to boost profitability, and also allocation of funds to other investment outlets that may readily provide liquidity at short notice. Profitability and liquidity are both desirable for the promotion of public confidence and the growth of a bank.
The underlying premise for Portfolio Management is that it enables the bank to identify, organize and execute necessary decisions in an orderly and consistent manner that ensures comprehensive attention to Portfolio creation, maintenance and adjustments. Portfolio Management is a dynamic process whereby the bank’s:
Ø Objectives, constraints and preferences are identified and stated in a written set of investment policies. ...
Ø Market conditions, relevant values and the banks circumstances are considered in establishing and monitoring portfolio performance.
Ø Portfolio adjustments are made to reflect changes in any of the risk/return quotient of investments and liabilities.
Most highly profitable avenues of investing bank funds like loans and advances put the objective of running a very liquid bank at risk. To the shareholders the desire to run a highly liquid bank is not extenuating for the management not to be growing profit annually. The importance of liquidity itself cannot be overemphasized in ensuring that a bank meets its obligations to depositors as and when due. A Bank’s first line of defense against deposit withdrawals is cash in the vault and reserves at Central Bank. ...
Portfolio Management tends to reconcile these conflicts by achieving desirable liability/asset mix vis-à-vis acceptable risk level. Emphasis is on the various risks inherent in the asset portfolio mix. The structure of portfolio is the concern of the management process, portfolio structure is the use of intricate process of portfolio mix to achieve a balance in risk dispersal in asset distribution that ensures concurrently sustained capability to meet crystallizing obligations as well as optimal profitability.
REGULATORY FRAMEWORK OF PORTFOLIO MANAGEMENT
Banking remains one of the most regulated industries in all economies. Regulation finds expression in portfolio management as a means of underscoring the importance public policy attaches to liquidity in the management of banks. ... Two principal institution regulating and monitoring aspects of portfolio management in banks in Nigeria are the Central Bank. Public policy regulation of portfolio structure of banks is aimed at safeguarding banks from adverse effects of unplanned net deposit outflow, as well as ensure stability in the domestic economy. ...
THE COMPONENTS OF BANK PORTFOLIO
The components of a Bank’s Portfolio addresses its targeted liquidity, credit risk and interest rate risk preferences i.
Approximate Word count = 2975
Approximate Pages = 11.9
(250 words per page double spaced)
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