Anderson School of Management Theses & Dissertations

Publication Date

5-15-1969

Abstract

STATEMENT OF THE PROBLEM

Bank management is constantly faced with the task of maximizing asset profitability within the constraints of liquidity and safety. In an attempt to aid management in the solution of this problem, several asset management models and theories have been developed. One such model was developed by D. Chambers and A. Charnes and was presented in the July, 1961 issue of Management Science. This model utilizes a linear programming approach to determine an optimal asset portfolio which maximizes profits while satisfying a bank's liquidity and safety needs. The purpose of this thesis is to critique this model.

PROCEDURES OR METHODS

This thesis examines both liquidity and safety from a theoretical standpoint. Criteria are developed based on theory and the Chambers' and Charnes' model is judged by its ability to satisfy these criteria. Theories other than those concerning liquidity and safety are studied including priority of funds, yield computations, and the interrelationships which exist between a bank's liabilities and assets. Various models other than Chambers' and Charnes' model (such as DeLong's, Corns', and Robinson's) are presented to inform the reader of what has been accomplished to date in the field of bank asset management.

RESULTS

It was found that the amount of liquidity needed by a tank varies according to loan and deposit fluctuations; each bank having its own distinctive set of circumstances influencing these loan and deposit fluctuations. The degree of safety required by a bank varies according to the risks present within asset categories and the individual bank's concentration of assets within that category. It was moreover determined that the amount of liquidity needed varied in accordance with the degree of safety, although the reverse situation was not true. Yield computations must give effect to the tax free qualities of certain bonds and should give effect to depositor's borrowings being more profitable than loans to non-depositors. A commercial bank must utilize priorities in allocating funds. These priorities are established as a result of practical considerations based on a bank's purpose. In order, these priorities are; meeting legal requirements, maintaining liquidity for deposit withdrawals, satisfying customer's legitimate loan demands, and investing residual funds.

CONCLUSIONS

The Chambers' and Charnes' model was found deficient from several aspects in solving the bank asset management problem: The priority of funds concept (which it ignored) precludes the selection of an asset portfolio based purely on yields; the model did not adequately determine how much liquidity a bank should have; and yield computations were faulty. On the other hand, Chambers' and Charns' use of the Federal Reserve's "Form for Analyzing Bank Capital" in determining capital adequacy or safety was found to be sufficient.

This thesis proposes a model using a "hard-core" approach to determine liquidity needs and the aforementioned Federal Reserve form to determine capital adequacy. The safety and liquidity factors are then integrated within a priority of funds framework. This model, without further empirical research into the determinants of future customer behavior and asset risks, most adequately satisfies the criteria and assumptions of this thesis, although it is by no means an optimal solution to the asset management problem.

Language

English

Document Type

Thesis

Degree Name

Master of Business Administration (MBA)

Level of Degree

Masters

Department Name

Anderson School of Management

First Committee Member

Ralph Lemon Edgel

Second Committee Member

James E. Brown

Third Committee Member

Edwin H. Caplan

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