Finance, Forex and Investments

What effect does inflation have on commercial banks?

Does the bank lose? what happens to lending? what happens to bank profits?

Public Comments

1. It depends on the duration of their loans.
2. The interest rate that the bank charges depends on what the bank paid for the funds it is going loan, the risk of default of the borrower, and the inflation rate. With inflation, the money paid back to the bank is worth less. For example, at the beginning of the year I lend you $10 to buy a book. A year from now that book costs $12 (inflation). If you pay me back only $10, I can no longer afford to buy that book. So at minimum, I want to charge you 2% so that I can have the same purchasing power that I had when I extended you the loan.