Consider two domestic banks that are identical in terms of their assets and liabilities composition. Both engage in traditiona banking lending primarily in the real estate market and raise funds primarily through deposits. However, one bank is based in the United States, where mortgage contracts have primarily fixed rates, and one is located in Australia, where mortgage contracts have primarily variable rates. Both banks faced policy rates close to zero in 2020-21, but a sudden increase in inflation forced the Fed and the RBA to increase policy rates significantly in 2022-23. Assess the impact of such policy rate changes on the two banks in terms of risk and profitability and suggest a possible strategy to limit the impact of the policy rate change. (Be concise and precise, you are allowed to type up to 40 lines, but you can answer in much less)
Consider two domestic banks that are identical in terms of their assets and liabilities composition. Both engage in traditiona banking lending primarily in the real estate market and raise funds primarily through deposits. However, one bank is based in the United States, where mortgage contracts have primarily fixed rates, and one is located in Australia, where mortgage contracts have primarily variable rates. Both banks faced policy rates close to zero in 2020-21, but a sudden increase in inflation forced the Fed and the RBA to increase policy rates significantly in 2022-23. Assess the impact of such policy rate changes on the two banks in terms of risk and profitability and suggest a possible strategy to limit the impact of the policy rate change. (Be concise and precise, you are allowed to type up to 40 lines, but you can answer in much less)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider two domestic banks that are identical in terms of their assets and liabilities composition. Both engage in traditiona
banking lending primarily in the real estate market and raise funds primarily through deposits.
However, one bank is based in the United States, where mortgage contracts have primarily fixed rates, and one is located in
Australia, where mortgage contracts have primarily variable rates.
Both banks faced policy rates close to zero in 2020-21, but a sudden increase in inflation forced the Fed and the RBA to
increase policy rates significantly in 2022-23.
Assess the impact of such policy rate changes on the two banks in terms of risk and profitability and suggest a possible
strategy to limit the impact of the policy rate change.
(Be concise and precise, you are allowed to type up to 40 lines, but you can answer in much less)
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