A bank cannot use its own prime lending rate as an index for the adjustment in interest r ate.

Question

Quizplus · Accepted Answer

A bank cannot use its own prime lending rate as an index for the adjustment in interest rate because it would create a conflict of interest. The prime lending rate is the interest rate that banks charge their most creditworthy customers. If a bank were to use its own prime lending rate as an index for the adjustment in interest rate, it would have an incentive to raise its prime lending rate in order to increase its profits. This would be unfair to borrowers, who would be forced to pay higher interest rates on their loans.

A Bank Cannot Use Its Own Prime Lending Rate as an Index