Managing Asset and Liability Risks

In repressed financial markets, banks faced little or no price competition, and experienced high profitability. Deposit interest rates were fixed and so were interest rates for some loans granted through government directed credit programmes. Rates on these loans ensured a positive and attractive interest spread. Rates on other loans were not fixed by the authorities and banks also recorded substantial spreads that were not competed away because of market entry restrictions. The supply of investment securities for savers and investors was limited, and the markets for these securities were shallow. Exchange control regulations restricted the freedom of banks to operate in foreign currencies, and fixed exchange rates isolated them, to a large measure, from exchange rate risks. With interest and exchange rates fixed, and the central bank providing discounting facilities in the event of a liquidity crisis, the major risk to be managed was credit risk. But even in this area, risk was minimized by the government directed or supported credit programmes. In fact, risks were low and returns were high for banks operating in repressed financial markets.