Interest Rates Essay

Submitted By yuyuparis559
Words: 764
Pages: 4

Interest Rates

Overview/Summary
With the instability of the economy today, people are losing jobs, business are closing down and people are starting to rely more and more on their credit cards. In these hard times money resources are becoming limited thus, we turn to our credit cards to help ease the times. By turning to our credit cards, credit card companies are increasing the interest rates, limiting credit limit, and canceling inactive accounts. With the economy as bad as it is, there is no letting down in the interest rates as they continue to increase. With the increase in interest rates, bankers are worrying what to do with business losing money and losses from real estate loans. Banks are more likely to have more issues due to the increase in interest rates. Interest rates is termed the relationship between the interest rate and the time to maturity of the debt for a given borrower in a given currency (tradingeconomics.com, 2012) The problems that the banks will likely encounter are such as paying more for deposits while the rates on the existing loans many increase. Therefore, the banks could potentially face bigger losses while making minimal profits (Ellis, 2010).
Opinion/Analysis
In an article written by David Ellis, he noted that the banks could face several issues due to the increase in interest rates (Ellis, 2010). Many believed that the increase rates could case banks problems since the banks are used to paying low deposits while charging higher rates for loans. In the United States, we have the Federal Reserve to control the money supply. The Federal Reserve has the ability to influence the interest rates depending how the economy is doing. The Federal Reserve did their best to keep the federal rates between 0% and 25% in 2010 which they had hoped to help boost the economy (Ellis, 2010). Based on this, the low interest rates have been beneficial to the lenders since it gives them the ability to borrow money inexpensively and be able to make lengthy payments on the loans. By making the loans longer to payback, it gives the lenders a chance to make a good profit. With that in mind, there is one threat that can change all that and that is inflation. Inflation can force banks to increase rates to help them with inflation. Consequently, increasing rates would results the banks paying for deposits which would decrease the bank profits. With that in mind, it has cause some troubles for bank regulators which is nothing new since an increase in interest rates is nothing new. In reality, many institutions have been affected since the savings and loan crisis twenty years ago (Ellis, 2010). With the crisis twenty years ago, new regulations have continued to develop throughout the years to helped lenders adjust to the periods of increasing interest rates. Banks whether large or small have all faced similar situations, thus they hope the Federal Reserve would slowing increase the rates instead of increasing it suddenly. By doing slowly increasing the…