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:— Charles Dickens, ''Oliver Twist''}} | :— Charles Dickens, ''Oliver Twist''}} | ||
{{drop|T| | {{drop|T|he basic model}} of a bank is to borrow, short-term, at a low rate, and lend, long-term, at a high rate. ''Generally'' banks calculate interest on overnight deposits, by which they borrow, at a [[Floating rate|floating]] rate. And they charge interest on the term loans, which they lend, at [[Fixed rate|fixed]] rates. | ||
''Generally'', therefore, banks ''borrow'' in floating and ''lend'' in fixed. They have “structural interest rate risk”. They want floating rates to be low, and to move lower. | |||
In that case, all other things being equal, they make money. (All other things are not always equal, though, as we know (but, apparently, Silicon Valley Bank did not).) | |||
So, a foundational question: How to determine what that floating rate should be, day to day? | So, a foundational question: How to determine what that floating rate should be, day to day? |