Question

1. As economic conditions change, how do banks adjust their asset portfolio? Research and provide some examples.

Answer 1

The banks adjust their asset portfolios with the changes in economy depending the situation is favourable or not.As the economic conditions change, the banks loan portfolio also changes.The assets portfolio of the banks are exposed to economic conditions as if the economy goes down those who have taken loans may find it difficilt to repay.

For example:If the economy is expected to be stronger then the banks would get encouraged to give more loans as the probability that a default may occur decreases and the potential for return would be higher.

For example:During weak economic conditions the banks are more cautious and reduces the amount of new loans to businesses.Under these conditions the banks would increase credit.