ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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.

Detailed explanation-2: -Liquid assets are less profitable as compared to long term assets. The dilemma to a finance manager is whether to invest in more profitable long term assets and risk low liquidity or invest in short term assets which are less profitable and therefore reduce return on investment made.

Detailed explanation-3: -AI Recommended Answer: Commercial banks must reconcile the conflicting objective of security and profitability. One way to do this is by monitoring and managing risks.

Detailed explanation-4: -They found that there is a significant negative relationship between liquidity and profitability. They also found that there is a positive relationship between size of the firm and its profitability. There is also a significant negative relationship between debt used by the firm and profitability.

Detailed explanation-5: -Conflicts of objectives Banks face a significant conflict between the desire to earn profits for shareholders and to enable the bank to expand, and the need for liquidity to enable the bank to meet its obligations to its customers. It is a fine balancing act which banks have not always done successfully.