ABSTRACT
AS noted in Chapter 1 discussing the effect of interest rates on the profitability and risk of depository institutions, an understanding of interest rate theories is of key importance to financial institution managers. During the U.S. subprime loan crisis in 2007 to 2008, and the following great recession, central banks engaged in monetary policies, including quantitative easing policies, to increase the money supply and keep interest rates low in order to stimulate their countries’ economies. As shown in Figure 2.1, in the United States the Fed Funds rate, the rate reflecting borrowing and lending for excess reserves between banks, fell dramatically. By 2010, this rate was close to 0%. Later in 2015 it rose to 0.25% and in 2016 to 0.50%. Figure 2.1 shows shadowed areas for recessions. Note, during recessions, interest rates typically fall with lower demand for funds.
