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Part 1 How do banks use asset management to make profits and to avoid insolvency or illiquidity? What is asset management?

Asset management by definition is the process of managing the composition of a bank primary and secondary reserve in the banks portfolio, so that, that particular bank would be able the meet the markets current loan demand. A banks primary reserve is the entire cash asset that a bank has, which includes all the cash reserves that the bank has: the reserve at federal bank; the reserve in their vaults; and other reserve that the bank deposited in various other banks vaults, all the banks cash items that are currently in the process of collection, and lastly all the miscellaneous cash assets that bank have in its possession. A banks secondary reserve is all the short term securities that bank currently holds, which normally composed of: short term T-bills, short term government securities, commercial papers, and etc. since cash assets normally does not generate any earning at all, as oppose to short term securities which still generate some, therefore because of this rationale a bank tend to holds more of its secondary reserve and less of its primary reserve in order to maintain their profitability overtime. How do bank uses asset management to make profits and avoid illiquidity? Since a bank generally makes most of its profits by creating loans that meet the current loan demands of the market and taking the money that it earns from the interest rates of the loan that they issued, therefore if the current markets loan demand increases i.e. the current economic condition makes it more profitable for a bank to issue more loans then that bank would sell some of its securities that they have in their secondary reserves portfolio in order to generate more cash assets so that bank would be able to make more loans while preserving its primary reserve position at the level where bank would still be able to protect themselves against the risk of not having enough cash reserve to meet the demand for cash from its consumer. On the other hand, if the current economic condition does not seem favorable enough, up to the point where markets loan demand decreases because of this situation, then bank should convert some portions of its primary reserve into short term securities i.e. secondary reserve, so that bank still would be able to make some profit even though the profit that they will be making by doing is less than the profit that they will be making if loan demand does not decrease, and be able to avoid the risk of being defaulted How do bank use asset management to avoid the problem of insolvency? Since the problem of insolvency itself in a nutshell is the problem of maintaining the balance in the trade off between liquidity and making profits; this trade off can be inferred from the rationale between primary and secondary reserve that I stated earlier, which essentially is the same thing as the problem of making good loans and maintaining its profitability overtime so that would be able too meet its obligation to its depositor ; paying them back their money that bank uses to create loans along with some interest. Therefore using asset management, bank would be able to handle this problem by doing things that I previously mentioned; when loan demand is high convert some of their secondary reserve into primary reserve and vice versa.

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