If a bank has more interest-rate sensitive liabilities than interest-rate sensitive assets, an increase in the interest rate will cause profits to:

Question

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If a bank has more interest-rate sensitive liabilities (such as deposits) than interest-rate sensitive assets (such as loans), an increase in the interest rate will cause the bank's cost of funds to increase more than the yield on its assets, leading to a decrease in profits. Essentially, the bank's net interest margin (the difference between interest earned on assets and interest paid on liabilities) will be reduced, resulting in lower profits.

If a Bank Has More Interest-Rate Sensitive Liabilities Than Interest-Rate