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Is it true that banks won't lend until interest rates go up?

Everyone has an opinion why banks are not lending money these days. One author in the article The Real Reason Banks Won't Lend Any Money talks about it from personal experience. He gives several reasons but one in particular is that, they won't start lending until interest rates move up. Discuss why you think this is a factor and do you agree or disagree with this assessment?

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First, consider that banks are for profit entities and the primary way they make money is by lending at decent interest rates. It takes a lot of capital to make enough money in interest to pay the costs of operations.

In this market when interest rates are artificially low because of the influence of the 'fed', banks must be even smarter to survive. If a banker suspects that interest rates may increase in the near term, it would be foolish to lend too much money or for too long of a time period. The longer that old loans continue in a rising interest rate environment, the less money the bank makes.

In theory, the bank must lend at higher rates than it pays for capital. Some of the capital that is lent comes from individuals who deposit their funds at interest in savings accounts. In that case, the banker must ...

Solution Summary

The 546 word cited solution explains how banks make profits, how they put their capital to work, where they get their working capital and provides three reasons why they are cautious about lending.

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