Question

The two conflicting goals facing commercial banks are:

1. profit and liquidity.

2. profit and loss.

3. deposits and withdrawals.

4. assets and liabilities.

Short answer

Option (a) profit and liquidity

Step-by-step solution

Explanation for the correct option

Like every other business, the prime motive for commercial banks lies in profit.Banks extend loans and buy securities to increase their profits as the loans and securities will help them earn interest payments, increasing their earnings.

However, another goal for commercial banks is safety.Safety depends on the liquidity of the banks. Higher the liquid assets (cash and excess reserves), the stronger the security of the banks because it assures the public that the banking system is steady. There is no need for panic withdrawals.

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.

Explanation for the incorrect options

Loss is never the motive of any commercial bank or business.Hence, there arises no point of contradiction between the goals.

Deposits and withdrawals are not the goals of commercial banks. Also, both the processes go hand-in-hand. If deposits decline, it automatically means a decrease in withdrawals.

Similarly, assets and liabilities also move together. An increase in assets implies a decline in the bank’s liabilities as the two are seen in relative terms to each other.