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Explanation:
In this scenario, the bank's primary assets are short-term, floating-rate loans, which can adjust to rising market interest rates almost immediately. In contrast, time deposits, which are a significant part of the bank's liabilities, typically have fixed rates until maturity or adjust with a lag. This mismatch in the speed of repricing means that the yields on the bank's loans will increase faster than the costs of its deposits, leading to an initial expansion of the net interest margin (NIM).
A is incorrect: While the cost of time deposits will eventually increase, there is a lag.
C is incorrect: The repricing of assets and liabilities does not happen simultaneously, leading to an initial impact on the NIM.
D is incorrect: While EME markets can be volatile, the initial impact on NIM in this specific scenario is predictable.
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Q.6359 An EME bank primarily utilizes short-term, floating-rate business loans and time deposits as its main assets and liabilities, respectively. If market interest rates rise, what is the most likely initial impact on the bank's net interest margin (NIM)?
A
The NIM will decrease significantly due to the higher cost of time deposits.
B
The NIM will initially expand as loan yields adjust quickly to the rising rates, while deposit rates adjust with a lag.
C
The NIM will remain relatively unchanged as the repricing of assets and liabilities will offset each other.
D
The impact on the NIM will be unpredictable due to the volatile nature of EME markets.