A rise in interest rates hurts thrifts because it

Question

Quizplus · Accepted Answer

When interest rates rise, the value of existing fixed-rate assets like mortgages declines, reducing the thrift's net worth. This is because the thrifts issue long-term loans at fixed-interest rates and finance them by borrowing at short-term rates. So, when interest rates increase, the thrifts may end up paying more on short-term borrowings than what they earn on their long-term loans. This results in lower profitability and a reduction in net worth. Therefore, a rise in interest rates hurts thrifts by reducing their net worth.

A Rise in Interest Rates Hurts Thrifts Because It