Why are some banks at risk for having large portfolios of low interest rate mortgages?
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Banks hold onto people’s money, called a deposit, and generally give them some interest in return. The way the bank can afford to pay them interest is the bank uses their money to give out to other people as a loan, and charge them a higher interest than what they pay for deposits.
The bank runs off of the difference in the interest rates – they charge some interest, use that to pay their costs (including the costs when people they loaned money can’t pay back), and give less out to depositors.
In theory a depositor can take back all their money at any time. This isn’t a problem as long as there’s enough other depositors who don’t to make up for it, but a necessary part of a bank’s business is that they use deposits to give out as loans, and so if everyone withdraws they won’t have enough money to pay out to everyone. This can cause a problem called a bank run, and is really bad. Thankfully the FDIC helps make sure customers get their money, but the bank can collapse and go out of business if it happens.
The problem with having too many low interest loans is two-fold: one, the bank isn’t making much money off of those loans, and it’s harder to run their business. Two, other banks that have better loans can entice customers to give them money with higher interest rates.
The banks with a portfolio of low interest rate mortgages may not be able to compete with those other banks paying more, and if enough people leave to earn more interest on their savings it’s possible the bank may not have enough money from other deposits that stayed to pay everyone leaving, and if it can’t raise money through other ways could collapse.
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