How can fluctuations in market interest rates influence bank profits?
Student-written example
Shared for study and reference. Not a sample of our professional writing.
About this example
This assignment was contributed by a student. The views expressed are the author’s and do not necessarily reflect those of UKEssays. Use it to inform your reading and develop your own work.
Question
How can fluctuations in market interest rates influence bank profits?
Answer
It is usually believed that the banking sector makes substantial profits from high loan rates, but the majority of bank regulators demonstrate their opinion that rising market rates are not necessarily associated with significant profits. In cases when interest rates increase, as a result of specific policy actions or other factors, bank managers recognise changes in the asset and liability aspects of their institutions’ balance sheets (Bannigidadmath and Narayan, 2016). The way in which market interest rates influence bank revenues is represented by a situation where increased market rates raise the precise amount of income bank can earn on new assets. Moreover, it has been argued that bank revenues tend to adjust to new market conditions, which illustrates the interrelations between fluctuating market interest rates and bank profits (Dia and Menna, 2016). Market interest rates also influence bank profits through their impact on important bank decisions, especially in relation to the specific loans and securities that can be purchased over time.
It is important to note that fluctuations in market interest rates can have a negative impact on bank profitability only in case asset and liability returns adjust at substantially different speeds. Banks and financial institutions with different sizes obviously respond differently to market rate changes. The revenues and costs available at larger banks imply that they tend to adjust more quickly to the changing environment in terms of market interest rates (Bannigidadmath and Narayan, 2016). Thus, larger banks are believed to handle interest-sensitive customers more efficiently compared to smaller banks. Yet, the performance of each individual bank is important in determining the exact adjustments of revenues and costs, which in turn affect bank profitability. It has been indicated that asset returns respond more efficiently to market interest rates changes compared to liability costs (Drakos et al., 2016).
References
Bannigidadmath, D. Narayan, P. K. (2016). Stock return predictability and determinants of predictability and profits. Emerging Markets Review. 26(1) 153-173.
Dia, E. Menna, L. (2016). Productivity shocks, capital intensities, and bank interest rates. Journal of Macroeconomics. 48(1) 155-171.
Drakos, A. A. Kouretas, G. P. Tsoumas, C. (2016). Ownership, interest rates and bank risk-taking in Central and Eastern European countries. International Review of Financial Analysis. 45(1) 308-319.
UK Essays writing support
Need support with your own question?
Get help from our experienced academic writers. All hold at least a 2:1 degree from a reputable university, and most hold a master’s degree or PhD, and/or have teaching experience.
Send us your question and, if you wish, any marking criteria. We’ll write a model answer to your brief.
Cite This Work
To export a reference to this article please select a referencing stye below:
Related Services
View all
DMCA / Removal Request
If you are the original writer of this assignment and no longer wish to have your work published on UKEssays.com then please click the following link to email our support team:
Request essay removal