| The study develops a balance sheet management model whereby the asset and liability structure of the banking firm is jointly determined, taking into account the resource cost. The model also generates various comparative-static propositions describing the decision making process of the bank. The comparative-static propositions are obtained by maximizing an institutional utility function, defined in a mean-variance framework, subject to several constraints; the constraints are the balance sheet constraint and the real source constraint.;The model has been subjected to extensive empirical testing. Forty-five banks with asset size exceeding ;The first phase of the empirical analysis is limited to the use of the OLS technique to estimate the parameters of the reduced form equations. By examining the OLS results, some symptoms of multicollinearity are present in the data set. To cure for multicollinearity, the Ridge Regression technique has been used.;To examine whether the New York (money-center) banks react considerably differently in their portfolio readjustment process to a change in an exogenous variable than do their counterparts in the rest of the country, six New York City banks have been analyzed extensively and have been compared and contrasted with the sample banks. In addition, to examine whether the sample banks have exhibited portfolio readjustment process substantially different than that of the overall banking system, the model has been tested by using aggregated data for 134 banks with an asset size exceeding one billion dollars.;It is difficult to draw any definite conclusion from the data that have been presented in the study. Nevertheless, it is evident that the specific model developed here and the general balance sheet management model offers considerable insight into the selection process of the commercial bank's portfolio and into other aspects of the bank's operation. |
