Case Study On Peralta National Bank

3) Peralta National Bank’s ALCO committee has lots to consider and lots on their plate given the circumstances and the future likely events. Currently, they are witnessing an upward sloping yield curve. However, they have to decide whether to investment in long-term or short term. Both investment alternatives have their own drawbacks and own benefits. As a result, even the ALCO committee is divided over which investment tenor to pursue. There was an argument that if the banks invest in short term they will have to sacrifice one percent of their net income over the limits set by the board, and this action won’t be acceptable to them. There is some merit in the argument, but it is based on faulty calculations. By maintaining a portfolio of short term, and long term investment, they can achieve the required rate of return. Hence, the argument amount not meeting the expectations of the board is not right. Similarly, the board will understand the current situation and will know that they cannot always expect the same return. In times of recessions and bumps, it will have to sacrifice some of the margin. At other times, it will get more margin than the required limit, due to uncertain events and hence on average the board will meet its expectations. ALCO should realize that one month’s performance should not affect their decision making. Secondly, ALCO is not taking into account the reserve requirements of the Central Bank. It would also have a huge role to play in deciding the policy for the investment of the funds in short-term and long-term. Another fault in the ALCO’s discussion is their failure to realize the fact that they need to be more liquid in order to make sure that they can pay their depositors. Hence, all of these factors are being ignored by ALCO and should be taken into account.
4) Yield curve is upward sloping. It guarantees a higher return in the long term investment and small or low return in the short-term investment. This means that the business should borrow short-term loans like Overdrafts and revolving credit line. This is going to be the clash of expectations with banks trying to seal long term deals, whereas the business segment will be willing to secure short-term loans. This will be protecting the interest rate risk. However, one party will have to take bitter sip out of the bottle in this situation. The situation is not win-win, and the business segment and bank’s objectives are targets are clashing and conflicting.
Bank’s current portfolio of loans is very good. There are very few or no non-performing loans. However, given the current situations, many companies and businesses will try to retire loans. This will enable the banks with lots of free funds. They can invest them in the long-term treasury. and equity. This will boost the stock market business and as a result many businesses will investment in the stock market to take advantage of the growth in the stock market. A stock market boom is expected, and businesses will borrow in short-term to invest in the stock market. Hence, the dilemma for the banks is to whether extend the credit to the business sector, or whether to invest in the long term treasury or equity.