Why did the end of regulation Q increase the desire of banks to make floating rate loans rather than fixed-rate loans?
Labels: Exam 2 Question 3
posted by Eschenfelder at 8:06 AM
Money and Banking Spring 2006
The following posts are the questions which appeared on last semester's exams. Students should use the comment sections to answer the questions and respond to the posts of other students.
Thursday, February 22, 2007
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Contributors
2 Comments:
The end of Regulation Q increased the desire of banks to make floating rate loans rather than fixed-rate loans because banks had to pay higher rates of interest on demand deposits to remain competitive in the market, and needed to make more money on their loans to offset this. Floating rate loans would keep banks from being squeezed by interest rate risk.
The end of regulation Q increased the desire of banks to make floating rate loans rather than fixed-rate loans because it enabled banks to aggressively compete for interest rates. Regulation Q imposed ceilings on deposit interest rates. Fixed rate loans carry an unchanged interest throughout the life of the instrument, whereas floating rate loans carry an interest rate that is adjusted periodically with change sin market rates. The end of regulation Q resulted in an increased desire for banks to make floating rate loans because floating rates are adjusted through the market.
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