Question

Easy multiple choice question

QUESTION 10 Lets assume the banking system in Europe got into some trouble and banks start making large losses and their solvency risk is increasing. You know that most European banks' assets have a longer duration than their liabilities. Which is the best option for the European Central Bank (ECB) to make banks more profitable again? The ECB could buy large amounts of long-term bonds to steepen the yield curve. The ECB could buy large amounts of short-term and sell some long-term bonds to steepen the yield curve. The ECB could buy large amounts of short-term and long-term bonds to steepen the yield curve. The ECB could sell large amounts of short-term and buy long-term bonds to steepen the yield curve.

Answer 1

The ECB could sell large amounts of short term and buy long term bonds to steepen the yield curve - this way the bank can get some return to cover losses and they can secure some fixed return for the future through long term bonds as the risk on fixed income products is less considering the market is risky at the moment.