Hello, I think I've answered these questions, but I'd like to know if my answers were right. So please spare your time help me: a)What pitfalls does a commercial bank face in a world of rising interest rates? Are adjustable rate loans the solution? b)Can the bank merely pass on its cost of funds by charging higher interest rates to its loan customer? c)What is an alternative way to handle applicants?
Banks try to match up their deposits and loans: fixed rate deposit (CD) with fixed rate loan (mortgage); floating rate deposit (savings account) to floating rate loan (home equity line of credit).If it can't do this in-house, often the bank will purchase the appropriate loans from another bank or on the open market.If that's not available, the bank can buy a derivatives contract to hedge its interest rate risk. Costs a little bit of money, but then again, so does all insurance. Some "insurer" is paid to handle the risk that interest rates will move in the wrong direction.Of course, a bank can't hedge away how its customers react.I don't know what you mean by "c".
Bank can run into issues such as short term deposits but long term loans and leases which can squeeze it during rising interest rates (a concern that was shared by officers when I worked at Signet Bank)
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