Suppose a bank currently pays an average of 4% interest on its savings deposits and receives an average of 9% interest on its loans. The bank's Chief Financial Officer (CFO) says the following. "We should lower the interest rate we charge for new loans. So long as it's above the 4% we pay on our savings accounts, each new loan will remain profitable." 

Briefly explain what is wrong with the CFO's reasoning.

Answer rating: 100% (QA)

The CFOs reasoning is flawed because it does not consider the overall cost of funds for the bank Whi... View the full answer