Competition lowers the expected return to a bank from putting its deposits to work.

Question

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When there is competition among banks to attract deposits, they may need to offer higher interest rates to entice customers to choose their bank over others. This can decrease the profit margins for the bank because they are paying out more in interest payments to depositors. Therefore, competition can lower the expected return for a bank from putting its deposits to work.

Competition Lowers the Expected Return to a Bank from Putting