When a bank makes a loan, is there a conflict between liquidity and profitability when they try to balance the two? Explain please.
2006-09-13 11:55:09 · 4 answers · asked by Queenie106 2 in Education & Reference ➔ Homework Help
Liquidity needs prevents a bank from investing all its cash.
Profitability comes from either the bank lending it or investing it.
Since a bank needs to be both liquid (legal regulations) and profitable (stockholder demands), there is inherent conflict between the two and needs to balance both.
2006-09-13 11:59:16 · answer #1 · answered by Anonymous · 0⤊ 0⤋
Yes, if you can't sell something, it is almost worthless, especially to a bank. Sure they will make you a car loan, but they don't need a car if you default. The liquidity in cars is less than say a share of stock which has a bid value that you can sell whenever you want.
2006-09-13 19:01:01 · answer #2 · answered by Dennis K 4 · 0⤊ 0⤋
The first mission of a bank is to make money. They don't have to carry tons of liquidity (a lot of cash) in their vault, except for the every day needs, but, as one man said, they are condemned to be make money (to be profitable). If they are not profitable, then they loose your trust, your business...and they die.
2006-09-13 19:05:44 · answer #3 · answered by robert43041 7 · 1⤊ 0⤋
Liquidity is what you or your business would be worth if you were to sell of all assets and add it to your cash at hand.
Profitability is when they are looking at your ability to proffer a net income or a set time period and then balance that against the amount of your liquidity
2006-09-13 18:59:44 · answer #4 · answered by cabjr1961 4 · 1⤊ 0⤋