Question

Suppose your bank has the following balance sheet:

What would happen to bank profits if the interest rates in the economy go down? What actions could you take to reduce the bank’s interest-rate risk?

Short answer

When the economy is stale or slow, the Federal Reserve may use its authority to lower the discount rate, making borrowing more inexpensive for member banks. Although a decrease in the discount rate benefits consumers who want to borrow money from banks, it also lowers interest rates on savings accounts.

Step-by-step solution

Content Introduction

The lower the loan fee, the additional willing individuals are to get the means to make huge buys. When buyers pay less interest, this gives them more cash to spend, which means expanded spending all through the economy.

Content Explanation

At the point when the Fed rolls out an improvement to either the fed subsidizes rate or the markdown rate, financial movement either increments or diminishes relying upon the planned result of the change. At the point when banks can acquire assets from the Fed at a more affordable rate, they can pass the investment funds to banking clients through lower financing costs charged on private or home loan advances. This establishes a monetary climate that supports customer getting and at last prompts an expansion in buyer spending while rates are low.

Albeit a decrease in the rebate rate decidedly influences loan fees for customers wishing to get from banks, buyers experience a decrease in financing costs on investment funds vehicles also. This might put long haul reserve funds in safe speculation choices down like testaments of store (CDs) or currency market investment accounts.