The case refers to the “classic trap of borrowing short and lending long”. Explain what this...
The case refers to the “classic trap of borrowing short and lending long”. Explain what this means. What are the advantages of borrowing short and lending long? What are the disadvantages?
Homework Answers
Borrowing short and lending long means that banks borrow short term- they borrow from people on a short term basis. However when they lend, they lend for a long term to firms/businesses who invest the money for a long period.
The advantage is that the banks can borrow on a lesser rate of interest and lend on a higher rate. This enables them to make a high gain. The disadvantage is the high risk involved. If too many people demand their money back on a short term basis, the banks will go bankrupt since they have lent out all their money for a longer term.
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The case refers to the “classic trap of borrowing short and lending long”. Explain what this...
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