The earnings of the S&L industry suffered as a result of maturity imbalances in

Question

The earnings of the S&L industry suffered as a result of maturity imbalances in the inflationary later 1970's and early 1980's. The development that created the problem was.

a. S&L's held too many short-term Treasury bills

b. There were sustained high interest rates in the late 1970's and early 1980's as a result of Federal Reserve monetary policy

c. The S&Ls were paying very low interest rates on NOW accounts

d. the S&Ls were earning high yields on consumer loans

e. none of the above

Explanation / Answer

Answer:

The development that lead to the crisis of S&L industry was persistent increase in the interest rates in late 1970's and early 1980's. The rise in interest rate caused 2 major problems for this industry:

First, the interest rates that they could pay on deposits were set by the federal government and were substantially below what could be earned elsewhere, leading savers to withdraw their funds.

Second, S&Ls primarily made long-term fixed-rate mortgages. When interest rates rose, these mortgages lost a considerable amount of value, which essentially wiped out the S&L industry’s net worth.

Hence, the answer to above question is B

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.