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When interest rates increase, what is the main problem that (especially) depository institutions face due to their nature of business


When interest rates increase, what is the main problem that (especially) depository institutions face due to their nature of business? Explain max. in 4 sentences. 

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Answer #1

Due to increase in interest rates, the most common problem which institutions face is lack of demand by the borrowers. Borrowers are not willing to borrow the funds from the lenders since they may be not in a position to repay it. Hence, financial institutions get less business as expected.

There is also a high liquidity costs which institutions face on account of hike in interest rates.

Hike in interest will also impact fluctuating rate mortgages.

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