Q5. The two conflicting goals facing... [FREE SOLUTION] (2024)

Like every other business, the prime motive for commercial banks lies in profit.Banks extend loans and buy securities to increase their profits as the loans and securities will help them earn interest payments, increasing their earnings.

However, another goal for commercial banks is safety.Safety depends on the liquidity of the banks. Higher the liquid assets (cash and excess reserves), the stronger the security of the banks because it assures the public that the banking system is steady. There is no need for panic withdrawals.

For maintaining higher liquidity, banks will have to minimize the loans and purchase of securities which will sacrifice their profit.

Therefore, liquidity and profit are two contradictory goals for commercial banks.