Reference no: EM133062165

In the early 1980s, when the yield curve was upward sloping banks made long-term fixed rate loans to their customers at 6%. They funded these loans with deposits that paid rates a bit below fed funds, say 4% at the time. Then short-term rates shot up to 7%, the banks turned unprofitable (i.e., they had to borrow at 7% while the loans still earned 6%) and many banks went out of business. That doesn't happen anymore-interest rates rise and fall and banks are okay. Why? What tools are available to banks to control interest rate risk? Be specific. What would a bank do today if a customer wanted a 10-year fixed rate loan?