The Bank Assets Allocation Under Strategies Of Liquidity Risk Management

The American sub-prime mortgage crisis has swept the whole world since 2007, and it not only interrupted the global economics, but also destroyed the banking systems. It tells us that, the bank security can't be measured just with asset adequacy ratio, and the static management based on balance sheet may caver the nature of risk. The key is to allocate the asset in reason and to keep liquidity of bank.Firstly, we analyze the background and significance of this topic, summarize the literature and give the research ideas, technical route and expected innovation of this paper. Secondly, we analyze the formation mechanism of liquidity risk and summarize the main three strategies and four methods of bank liquidity risk management based on the definition, and decide what strategies are used to deal with the bank asset allocation based on bond market and lending market under the DD model framework. Thirdly, we use nonlinear optimization to create bank optimal asset model with three different liquidity risk management strategies, which follows the study of Franck & Krausz(2007), to deeply analyzes how the strategies affect the bank asset allocation and the maximum solvency when bank faces liquidity risk and wants to have great profits. This model improves the former studies that use simple objective function and neglect depositors' behavior when they use LP to create bank optimal asset model, and adds the liquidity strategies into models which were studied just in qualitative. Our paper shows that, all the three strategies can increase the bank asset allocation, profits and maximum solvency, and bank can hold less cash but more profitable assets to gain more profits under certain liquidity needs. Fourthly, we use data simulation to analyze the characteristics and advantages of each model, and choose 8 Chinese commercial banks to do empirical study, which shows that the model under equilibrium liquidity management fits well to Chinese commercial banks, and Chinese commercial banks have a shortcoming that their assets are solid-state. This paper also gives two recommendations according to the whole research.