Explain Banks profit by lending long term loans assets and borrowing short term

Explain banks profit by lending long term loans

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case would lead to higher profitability for banks? Explain. Banks profit by lending long term loans (assets) and borrowing short term deposits (liabilities). When yield curve is steeply upward sloping, it means loans can be issued
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at significantly higher rates than the rate of short term securities, meaning a larger profit potential. 11) When a financial crisis begins, would the problem of adverse selection and moral hazard in financial markets worsen? Give explanations. Banks cut back lending due to increased default probability. Credits become harder to obtain, even firms with good credit record cannot borrow money. This means adverse selection problem worsens. Moral hazard also worsens as when firms are nearing bankruptcy, they would have little to lose when an investment fails, therefore they tend to increase risk exposure. 12) Suggest one advantage and one disadvantage for banks to raise less liabilities from checkable deposits and raise more from loans and certificate of deposits, a trend since 1960s. Advantage: more flexible, can raise funds at any time, time deposits are more stable than checkable deposits Disadvantage: Higher interest rates so borrowing would incur larger costs.
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