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Secondary marketing

F

Frances

Member
Hi,

I don't understand how the example of a bank issuing more Certificates of Deposit can maintain the maturity gap, whilst increasing profitability. Is the secondary marketing referring to the assets of the bank or the asset that is the Certificate of Deposit to the holder. It sounds as though from the example, secondary marketing is referring to the fact that CDs are assets to those who hold them. Could someone please clarify this for me?

Thanks,
 
Suppose a bank issues a CD with a term of one year. Then the bank doesn't have to repay the CD (with interest) for exactly one year, so it isn't a hugely liquid liability for the issuing bank. However, as CDs are marketable, the buyer of the CD can qucikly and easily sell it on at any time should they wish to get some cash. So, the CD is a very liquid asset for the buyer / holder.

So, the issuing bank gets some liquid cash (asset) in return for issuing a less liquid liability and thereby reduces the differene in average maturity between its longer-term assets and its shorter-term liabilities, without necessariliy reducing its profitability, as it can use the cash raised to invest in some other short-term, liquid asset.

Secondary marketing just refers to the CD (or any financial asset) being sold on to someone else before it matures.
 
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