The case of Winthrop Bank, question 9A
“The target average maturity of loans is increased, with overall risk tolerance unchanged.”
Target maturity of loans is increased, means its durations will be increased. So can we argue that the target maturity of securities portfolio can be increased, to match the duration of assets to loans ?
The question is:
“The target average maturity of loans is increased, with overall risk tolerance unchanged.”
The answer to it is :
“Because the loan portfolio is now subject to greater interest rate risk, although overall risk tolerance has not changed, the target maturity of the securities portfolio must be reduced to offset the loan portfolio’s greater risk.”
If loan duration is increased, shouldn’t we increase the securities portfolio’s duration as well? So that we link up asset and liabilities duration?
The loans aren’t liabilities; they’re assets. The bank lent money to customers.
Thank you, and i am sorry for asking a stupid question.
Don’t apologize; it wasn’t a stupid question.
Glad to have helped clear up the confusion.