What does the phrase “banks borrowing short and lending long” mean?
In: 39
“Long” and “short” in this phrase refer to the timeframe of a loan.
When a loan is made, the person who borrowed the money has to pay the loan back with interest. The amount they have to pay back depends in part of how long it will take them to pay it back. For example, in normal economic conditions, a 1 year loan might have a 5% interest rate while a 10 year loan might have a 6% interest rate (you might hear about something called the “yield curve” which is just a graph showing the relationship between interest rates and the length, or maturity, of a loan).
Banks can use the difference between those interest rates to make money by borrowing money over short time frames (borrowing short) and loaning it back out over long time frames (lending long).
Latest Answers