Liability Management and Capital Adequacy

Abstract

In addition to such traditional banking liability management challenges in the form of the appropriate mix of interest-bearing deposits to stockholders funds and the correct balance of money market involvement, the Euro-bank faces the additional issue of substantial dependence for its liabilities on an interbank market which, as the events of 1974 demonstrated, can be a highly volatile and uncertain source of funds. While the Euromarket loan pricing concept has simplified the banker’s task of ensuring a relatively fixed gross interest margin on the bulk of his loan portfolio, a concept which does not exist in many national money markets, he cannot avoid the fact that he is essentially funding loans with an average life of perhaps three years with money market deposits of primarily three to six months in maturity.