Rising interest rates may cause banks to make riskier decisions

After the financial collapse in 2008, the Federal Reserve worked to bring interest rates down through bond-buying programs that encourage consumers to borrow, which then helps the economy recover. Since then, rates have remained at historically low levels, inspiring many borrowers to take advantage, and many homeowners turned to refinancing opportunities on mortgages, providing banks with a large source of revenue.

Now, however, rates are rising. The Fed has said previously that programs to keep rates low may not continue after this year, inspiring many to take advantage while they can. Consequently, this pushes up rates, which hit the highest level this month than in the past year. As a result, banks are seeing a decrease in refinance applications.

Because of this new shift, banks may see a decrease in profits from the lack of refinances. An article in Bloomberg said that some banks may respond by laying off staff, or loosening lending standards to expand their balance sheets.

While this was the intention of the low rates—to encourage borrowing to help the economy recover—this also means that banks are taking on more risky investments, potentially causing a loss if borrowers are unqualified. To combat this, lenders can use risk management tools, such as risk assessment software, to prevent risky investments from causing the loss in profits that these investments are working to avoid. Additionally, for banks that look to decreased staff as an alternative, tools like application processing software can help by making the borrowing process more efficient.

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Rising interest rates may cause banks to make riskier decisions

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