Large bank corporations now tend to have both traditional lending divisions as well as securities market divisions. This was not always the case; regulators used to keep financial firms locked to specialisations — this was referred to as “the pillar system” in Canada. However, ongoing deregulation eroded the pillars — I discuss part of the economic logic below. It is possible to find banks that stick to a traditional loan/deposit structure (particularly in the United States, with a highly fragmented banking system), but those banks tend to be smaller.
"The easy conceptual way to do this is to imagine holding a portfolio of assets that matches liabilities exactly, then one adds “overlay” trades to that naïve matching portfolio to end up with the actual portfolio held. The risk of the positions versus the liabilities equals the risks of the overlay trades."
If this ends up in a book, expanding on this with examples and diagrams might help.
Banks, Securities Markets And Risk
I have difficulty understanding this passage:
"The easy conceptual way to do this is to imagine holding a portfolio of assets that matches liabilities exactly, then one adds “overlay” trades to that naïve matching portfolio to end up with the actual portfolio held. The risk of the positions versus the liabilities equals the risks of the overlay trades."
If this ends up in a book, expanding on this with examples and diagrams might help.