Tag: Lending Profitability

Why Two Fives May Not Equal a Ten In Commercial Lending?

Bank Profit With Interest Rate Movement

An old strategy in commercial banking when faced with a borrower that wants a 10-year fixed rate loan is to offer a 10-year loan that adjusted in five years.  This has historically worked with some customers and has paid off well for banks over the last 35 years as 5-year rates have fallen.  The graph below shows 5-year Treasury rates for the last 35 years.  As interest rates have generally fallen over the entire period shown, 5-year loans generated wider net interest margins for lenders (as cost of funding decreased over the period) and the borrower also benefit

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