The Effect of Interest Rates on Underwriting Standards

When the yield curve is steep, a bank will make intermediation profits where they take deposits at short-term maturities and low interest rates. They use that money to support longer-term loans at higher interest rates - but when it flattens out, risk control becomes extremely important. So you get a tightening up of lending standards. We saw that big time with the subprime lending in the U.S., they let people with low incomes create their own incomes when they filed for a loan. And that went out for a long time. People were qualifying, they should never qualify for a loan,. And Fed checks up interest rates, and that was the end of the subprime market