Question

For a typical bank with more rate-sensitive liabilities than assets, the use of floating-rate loans is beneficial for all but which of the follow reasons?

A interest rate risk is transformed into credit risk

B less need for other measures such as interest rate swaps, simplifying operations

C overall bank interest rate risk is lowered, resulting in better inrerest rate stress test results

D net interest margin does not fall as much when rates rise, helping maintain Net Income

Answer 1

When a bank with rate sensitive liabilities than assets use floating rate loans then it is beneficial for all the above reasons except option A i.e the interest rate risk is transformed to credit risk. The interest rate risk is the risk involved in the change in the interest rates but the credit risk deals with the risk of non-payment of the loan. The inteest rate risk is different from the credit risk. The credit risk will remain as it is but the interest rate risk will vary.