|6. Asset & Liability Committee|
|What you need to know||Join the meeting||Review the Reports||The board´s response|
|Watch the Video||Liquidity and Market Risk Management||Managing Liquidity Through
Assets and Liabilities
|Liquidity Policy||The Investment Policy||Using Reports to Manage
Will approval of the recommendation brought to the table by Madison to sell $1.6 million in U.S. Treasury notes and buy a like amount of Federal Home Loan Bank notes be in the best interest of the bank given an expected rise in interest rates?
Remember, earlier parts of the discussion on liquidity and market risk specify that it is the job of the Asset and Liabilities committee (ALCO) to:
How do your thoughts on the recommendation match up with those of your fellow board members at Insights Bank?
There was definitely a turn of events at the meeting. The outside directors, who were largely silent throughout the first part of the meeting, came forward with the analyses that should have accompanied Madison’s report from the ALCO. Bill Williams’ analysis about the bank’s liquidity position was right on target.
The bank, because of its loan growth, was becoming less liquid. Purchasing the five-year note would further reduce liquidity by replacing a liquid asset—the maturing U.S. Treasury note with a less liquid one. Similarly, George Titus hit the mark with his comments about the note purchase potentially increasing the bank’s exposure to rising interest rates. If rates rise as expected, the bank’s net interest income would decline more than if the notes had not been purchased. The recommendation to buy the notes is not a good one.
Madison isn’t trying to harm the bank, but her problem in this instance is that she is totally focused on the bottom-line performance of the bank—buying the higher yielding Home Loan Bank note would provide more interest income than the maturing Treasury note. She has forgotten that the bank has other needs as well. In this case, the bank has a growing need for liquidity. Also, it needs to manage possible exposure to rising interest rates.
Although you may never unveil a detailed analysis on the rest of the board the way George and Bill did, the analyses provided by your fellow outside directors at Insights Bank are instructive for a couple of reasons.
After you complete this lesson, you should be able to:
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