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Managing Your Balance Sheet Mix

"Donít put all your eggs in one basket."

This adage can be traced from ancient Chinese proverbs, through biblical times, to modern business theory. Diversification remains the most fundamental of all principles in the world of risk management and explains why A/L BENCHMARKS provides information on Balance Sheet Mix (%).

The Balance Sheet Mix information identifies three categories of investment securities and three categories of loans. There are two other asset categories, Cash and Other Assets, which are not interest rate sensitive.

How do you compare? Are your percentages within one standard deviation of the mean? Have you decisively established your asset mix, or is your allocation a result of competition and your marketplace? Regardless of how you measure, are you comfortable with your asset allocation?

The mix percentages also identify four categories of deposits and two categories of borrowed funds. The Other Liabilities and Equity categories complete the liability side of the balance sheet. All sources of funding are expressed as a percentage of Total Assets to give comparability to asset mix percentages.

Where does the majority of your funding come from? Core Deposits, Purchased Funds, or Equity? Can you change your funding mix? Do you want to change your mix?

Balance Sheet Mix provides a useful insight into the major areas of financial risk; asset quality, liquidity, and interest rate risk. The regulators are interested in all three, and bank executives need to measure all three for adequate risk/return analysis. A/L BENCHMARKS provides key information to help your analysis. Is your asset allocation comparable to your peers? Is it consistent with your sources of funding?

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