Question

Suppose that bank AAA offers an interest rate of 6.5% on both savings and loans, and another bank, Bank BBB, offers an interest rate of 8.3% on both savings and loans. What profit opportunity is available? Which bank would experience a surge in the demand for loans? Which bank would receive a surge in deposits? What would you expect to happen to the interest rates the two banks are offering?

Answer 1

AAA offers 6.5%

BBB offers 8.3%

Profit Opportunity = We can borrow from the bank with low interest rate and deposit in the bank with high interest rate so that we have to pay less interest and we earn more interest and can enjoy the profit in - between.

AAA Bank will experience a surge in the demand of Loan because AAA is offering cheaper interest then BBB.

BBB Bank will experience a surge in the demand of Loan because AAA is offering more interest on deposit then AAA

Ultimately both the Bank's interest rate are going to get closer to each other. Looking at the demand and supply of Loana and Deposits. AAA will increase the rate and BBB will decrease the interest rate untill the Rate of Interest of both the banks are same.

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