The Role of Commercial Banks in an Uncertain Interest Rates Environment

Prior studies on the role of banks have suggested that banks took the role of a broker or an asset transformer when performing their liquidity function. The extent of brokerage or asset transformation function was viewed from how banks managed their assets and liabilities. Although studies to illustrate the role of banks are not few, we proposed to characterize the role of the broker and asset transformer. In this sturdy we developed an index to measure the extent of the role of the bank in an uncertain interest rate and cost of fund environment. By looking at the decision making process involve in granting a loan commitment to existing clients of the banks, we conduct a preliminary sturdy to ensure that the index is operational. The results indicated that the bank perform the role of a broker in a volatile interest rate and high penalty rate environment. The results also suggested that banks perform the role of an asset transformer when the costs of fund are high.