Bank managers seem to have to walk a tightrope between managing risk and earning a profit. Explain.

What will be an ideal response?

If we consider the various forms of bank risk and the possible ways to manage it, we can see the challenges posed for a bank seeking to make the highest possible profit (to satisfy its owners). Managing liquidity risk means having to structure securities holdings so that sales can be carried out if needed. This means holding shorter-term securities such as Treasury securities, but they tend to pay less of a return. Managing credit risk means having to diversify, which may mean higher costs to the bank as it gives up a competitive advantage in a narrow line of business? Managing interest-rate risk means restructuring assets to better match liabilities and, as with liquidity risk management, this also reduces potential profitability. Add to this the limitations imposed by regulators (such as not being able to own stock and monitoring of bank leverage) and one might wonder how banks ever manage to earn a profit.