An FI that finances long-term fixed rate mortgages with short-term deposits is exposed to

Question

Quizplus · Accepted Answer

This scenario describes interest rate risk, specifically the risk of funding long-term assets with short-term liabilities. When interest rates rise, the cost of short-term deposits (liabilities) increases faster than the income from long-term fixed-rate mortgages (assets), leading to decreased net interest income. Additionally, the market value of these fixed-rate assets decreases because new loans are issued at higher rates, making the existing lower-rate loans less valuable.

An FI That Finances Long-Term Fixed Rate Mortgages with Short-Term