If Interest rates just mean the bank are making more profit back doesn’t that mean they want them to be as high as possible? What incentivises them to reduce rates and make less money?
In: Economics
Banks are in the business of transforming risk – usually by transforming short term deposits into long term loans. For this they charge a margin between the costs of borrowing and the interest on deposits.
Retail banks generally avoid taking a significant position on interest rates, which means that they don’t make more or less money either way – they trade off risk into the interbank market until they are basically immune to most interest rate movement.
Investment banks and hedge funds are able to take a limited position and make more money if rates move, but they will position themselves according to what they think will happen, rather than always getting more money for higher rates.
Regarding when they would reduce variable rates (on borrowing like mortgages), there is the typical competitive pressure to reduce rates, and regulators have rules and guidelines about changing the SVR.
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