An article in the Wall Street Journal noted that large commercial banks such as Wells Fargo and

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An article in the Wall Street Journal noted that large commercial banks such as Wells Fargo and Citigroup have been making loans to nonbank financial firms. “The nonbanks turn a profit by charging [subprime] borrowers a higher rate—say, 15% on a subprime auto loan—than what they pay to the bank, which might be 3%. The bank makes money on that 3% loan because it is funded by deposits, on which it pays almost nothing.”

a. What does the article mean by a “nonbank”?

b. What is a “subprime” auto loan?

c. What does the article mean when it states that banks pay almost nothing on deposits?

d. Why doesn’t a commercial bank like Wells Fargo directly make loans to subprime borrowers if those borrowers are willing to pay such high interest rates?

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Economics

ISBN: 9781292430645

8th Global Edition

Authors: R. Glenn Hubbard, Anthony P. O'Brien

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