Briefly explain why keeping excess reserves in banks is considered to be expensive?
Why do banks prefer to manage liquidity risk by adjusting liability side instead of assets?
Answers
Explanation:
Banks operate by providing loans to people from the money people deposit in banks and take out the profits out of the interest rate. If a bank keeps on stacking its reserves/deposits and does not give loans, ultimately they will be squeezing their profit and this is an expensive strategy.
Secondly, liquidity money is easier to manage than asset because assets usually are not easy to sold or exchange than money, that is why bank usually gives loan in terms of money not assets
Answer:
Bank have make their profit by providing loan, it is the main function of banks. If Bank will have excess reserves, it mean bank deceases profits, so therefore it considered as so expensive.
Bank deals with money not with assets. Banks has function accept deposit and provide loan. Bank never deals with assets.