Why are some banks at risk for having large portfolios of low interest rate mortgages?
In: 66
If Smalltown bank holds a $100k mortgage at 3% interest, it can sell it rather than keeping it for 25 years and collecting all the interest.
It could sell it TODAY to another bank at a smaller profit (say $140k) if it wanted.
If interest rates go up to 6% AND Smalltown bank needs cash because depositors are withdrawing their money in large amounts then it has a problem. It hasn’t got enough cash on hand to pay them all.
*** Now the bank has to turn their less liquid assets (mortgages) into cash to pay everyone.
But what bank wants to buy a 3% mortgage when they can buy 6% mortgages elsewhere and make more? OK they’ll take them today but only for $80k. Smalltown just lost $20k
Word gets out, the bank is looking dodgy. More cash gets withdrawn.
Now go back to ***
Finally, no deposits, no mortgages left. Bank folds.
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