The Bank Assets Allocation under Equilibrium Liquidity Management Strategy

Bank assets allocation is one of the most important project of bank management. In this paper, we built sub-optimization models within DD model´s three-period framework to study bank´s assets allocation under equilibrium liquidity management strategy when bank faces depositors´ early withdrawals. Our study shows that when a variety of interest rates and parameters satisfy certain conditions, the equilibrium liquidity management strategy will reduce bank´s cash holding and increase bank´s profit and max solvency in varying degrees, so that the bank can balance its profit and liquidity. The empirical tests show that Chinese commercial banks have the problem of assets solid-state which can make bank face liquidity risk, so we need to concern about it.