A bank has a model that tells it that interest rates are expected to rise in...

A bank has a model that tells it that interest rates are expected to rise in the next 3 months. With respect to the durations of its assets and liabilities, what strategies do you suggest for the bank?

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Expert Solution

A bank is a financial institution which is engaged granting loans, accepting deposits etc. As a general rule, a bank usually earns money by providing loans to the civillians, institutions, etc and such loans are provided from the funds that bank gathers from people in the form of deposits i.e., the banks net income is the interest received (on loans given) after the interest paid (on the deposits received).

Deposits are banks liability whereas loans are banks assets. If a bank comes to know that the interest are going to increase in the next few months, then it is going to promote deposits at such low rates since the report of such hike is an internal report. It will promote deposits by introducing new schemes such as free credit cards, other benefits attached with this account etc. Further, the bank would try to reduce the new loans provided by it so that it can earn high amount of interest in the event of rise in interest rate.

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