Before the dramatic increase in interest rates, savings and loans were paying a regulated rate on their liabilities (deposits) and earning a higher rate on their assets (mortgages). They had a positive interest rate spread which also gave them a positive net interest margin. Since they were quite confident concerning the cost of funds, they could set mortgage rates that would ensure an adequate spread and margin. Once interest rates began to increase and the rate ceiling on deposits was removed, the interest rate offered to depositors (cost of funds) increased, but because most of the assets of savings and loans were in long-term mortgages, the interest earned on assets was fairly interest rate insensitive.
This quickly put many savings and loans into negative spread and margin positions and contributed to the crisis that was to hit this industry.
Indicate whether the statement is true or false.
Answer: True.
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a. True b. False
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