Question

If a bank has a lot of long?term loans, it will probably want to reduce interest rate risk by encouraging __________?term deposits, especially of interest rates are expected to __________ in the future.

A) short; rise

B) long; fall

C) short; fall

D) long; rise

Answer 1

If a bank has a lot of long term loans, it will probably want to reduce intrest rate risk by encouraging short term deposits, especially of intrest rates are ecpected to rise in the future.

Banks cannot avoid the exposure of intrest rate risk. A bank can finance long term loans with short term borrowings such as demand deposits. Bank regualtors must watch intrest rate as te fluctuations is the intrest rate can cause damage to the financial system.

Intrest rate risk is the risk which influences banks earnings or capital due to the changes in the movement of intrest rates.All banks face intrest rate risk. The banks regulators can monitor and detect these risks and take preventative steps to manage intrest rarate risk