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Explanation:
When interest rates rise, borrowing becomes more expensive for individuals and businesses, which can lead to increased credit risk as some borrowers struggle to meet higher interest payment obligations. This can result in higher default rates, negatively impacting the valuation of a bank’s loan portfolio and overall financial stability.
A is incorrect: Empirical evidence suggests that a 100 bps change in short-term rates typically leads to a less than 20 bps change in NIMs, not over 50.
B is incorrect: While lending volume matters, the impact of interest rate changes is more directly determined by the interest rate sensitivity and repricing characteristics of a bank’s assets and liabilities.
D is incorrect: NII typically constitutes a larger proportion of total income for EME banks compared to AE banks, as EME banks rely more on traditional lending activities and less on fee-based or investment banking services.
Q.6349 Regarding the impact of interest rate changes on a bank's economic value, which of the following statements is correct?
A
Changes in short-term interest rates have a substantial and consistent impact on net interest margins (NIMs) of over 50 basis points per 100 bps change in rates.
B
The impact of interest rate changes on a bank's net interest income is primarily determined by the overall volume of lending activity.
C
Rising interest rates can indirectly affect valuations by increasing credit risk and potentially leading to higher default rates.
D
Net interest income (NII) is generally a smaller proportion of total income for banks in emerging market economies (EMEs) compared to those in advanced economies (AEs).
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