If a bank has long-term fixed-rate assets and short-term liabilities, and interest rates increase over time, its net interest margin should
A)decrease.
B)increase.
C)stay the same.
D)EITHER decrease OR increase, depending on whether the asset maturities exceed 10 years.

Question

Quizplus · Accepted Answer

When a bank has long-term fixed-rate assets and short-term liabilities, an increase in interest rates will raise the cost of the bank's short-term liabilities more quickly than the income from its long-term assets, which remain fixed. This mismatch causes the net interest margin to decrease.

If a Bank Has Long-Term Fixed-Rate Assets and Short-Term Liabilities