Analyzing Bank Profitability Components
A commercial bank initially has $100 million in deposits, on which it pays 2% annual interest. It has loaned out this entire amount at an annual interest rate of 5%. In the following year, facing new competition, the bank adjusts its rates: it now pays 2.5% on deposits and charges 4.5% on loans. These new rates attract more business, and its total deposits and loans grow to $200 million. Did the bank's total profit from these activities increase or decrease in the second year? Justify your answer by calculating the profit for both years and explaining the roles of the interest rate spread and the volume of business.
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