When interest rates rise, banks generally benefit from an increase in net interest margins.
The difference between the interest that banks get on loans and investments and the interest that they pay on deposits and other obligations is known as the net interest margin.
An increase in interest rates means that banks can charge higher interest rates on loans while continuing to pay the same interest rates on deposits.
Bank earnings increase as a result, resulting in a bigger net interest margin.
However, rising interest rates can also impact the demand for loans. Interest rates rise, increasing the cost of borrowing money.
As firms and people become less eager to take on debt, this may result in a decline in the demand for loans.
The outcome might be a halt in loan growth and a reduction in profitability for banks.
Moreover, rising interest rates can affect the credit quality of bank loans.