Directions: Please limit the written response to 6 pages of text, plus an executive summary of up 

to 1 page. References and up to 6 pages of figures and tables do not count against this limit. All 

figures and tables should be self-contained, referenced in the text, and included at the end of the 

document. Text should be single spaced in Times New Roman font, 12 pt, with 1” margins on all 

sides of the page.

Question: What are the expected impacts of higher interest rates in the U.S. economy on the 

banking sector, and how should regulators respond?

Changes in interest rates can impact a bank’s business operations and decision making in various 

ways. In their roles as lenders, depository institutions, and employers, banks often enter into 

contracts that specify payments in nominal rather than real terms. These payments may include 

employee wages, interest on deposits and loans, and fees for financial services. Moreover, 

higher interest rates may affect banks indirectly through their impact on stakeholders (e.g., 

borrowers, depositors, other debtholders) and the broader economy. Higher interest rates can 

spur various responses from politicians and regulators seeking to minimize any harms. While 

higher interest rates can affect many different aspects of the U.S. economy, the impacts may not 

be the same across banks, individuals, industries, or geographic areas.

Your goal is to study the effects of higher interest rates on one aspect of the banking sector and 

use your analysis to motivate possible recommendations for regulatory action. The quality of 

your analysis is more important than the specific issue that you choose to examine. The next 

section gives examples of areas where some experts believe that higher interest rates may impact 

the banking sector. This is not an exhaustive list, and you may explore any of these or put forth 

your own topic.

The analysis of your chosen topics should rely as much as possible on empirical evidence (e.g., 

graphical, statistical, and econometric analysis), but other types of evidence (e.g., interviews with 

industry experts) can be used as required.

Described below are available data sources that could help illustrate your arguments, but you 

may use other publicly available data as desired.

 The Federal Deposit Insurance Corporation (FDIC) releases (1) quarterly data on the 

business behavior of community, regional, and national banks through Call Reports, 

which are available from the Federal Financial Institutions Examination Council 

(FFIEC), and (2) annual data on the location of physical bank offices through the 

Summary of Deposits.

 The Federal Reserve Bank of Atlanta (FRB Atlanta) releases data on the monetary policy 

of the Federal Reserve, including a measure of the federal funds rate designed to 

incorporate the effects of special actions.

 The Bureau of Economic Analysis (BEA) releases annual data on basic economic 

activity, including employment and gross product, at various geographic levels.

 The Federal Reserve Bank of Cleveland (FRB Cleveland) produces a monthly estimate of 

inflation expectations for the U.S. economy, and the Bureau of Labor Statistics (BLS) 

produces both national and regional price indices.
Part I: Conceptual Framework

Develop a concise conceptual framework that discusses potential effects of higher interest rates 

on the banking sector. Use this framework to motivate hypotheses to illustrate with data, as 

described in the following sections. You can focus on economic, demographic, and 

socioeconomic outcomes, including employment, personal income, access to credit, or other 

measures that you deem potentially important.

The following are some examples of issues that your conceptual framework could address.

 How do interest rates impact bank profitability?

 How do interest rates affect bank safety and soundness?

 Does the effect of higher interest rates on bank depend on whether banks, borrowers, and 

depositors correctly anticipate the increase in interest rates? 

 How do changes in interest rates affect depositor behavior, and what do those changes 

mean for banks, borrowers, and regulators?

 How do interest rates change the types of services or loans that borrowers seek from a 

bank?

 How do changes in interest rates affect a bank’s existing stock of loans and deposits?

 How do banks change their loan portfolios and lending behavior as interest rates change?

 What industries are most likely to experience a change in lending behavior from banks in 

response to a change in interest rates? Why?

 Why might higher interest rates affect banks today differently than during historical 

periods with comparable interest rates? 

Whether you choose any of these issues or decide to take a different path, a deep dive into a 

focused question (or a small set of related questions) is encouraged.

Part II: Empirical Analysis

Using the data available through the FFIEC, FDIC, FRB Atlanta, BEA, FRB Cleveland, BLS,

and/or other publicly available sources, describe changes over time or differences across groups 

(banks, consumers, industries, geographic areas) in the outcome measures proposed in the 

previous section. In your analysis, it may be helpful to compare groups that are more likely to be 

affected by the issues you study to groups that are less likely to be affected by those issues. 

Depending on the structure of your analysis, you may choose to include all geographic areas 

and/or focus on specific areas where you may be more familiar with local regulations and the 

economic environment.

Part III: Interpreting the Empirical Findings

Describe and discuss how the patterns you have identified support your hypotheses. It may be 

helpful to address the following questions, though you are encouraged to develop and address 

questions that relate to your specific approach.

 What differences exist between groups for the measures you examined?

 Do these differences match up with the predictions from your conceptual framework?
 Are there geographic, industry, or bank characteristics that appear to amplify or weaken 

the impacts of inflation?

 Are the estimated effects of higher interest rates larger in the short run or the long run, 

and are these findings consistent with your conceptual framework?

It is important to assess your findings critically and understand the limitations of your analysis. 

In this regard, it may be helpful to address the following questions.

 What factors should be considered when determining if a data pattern is related to 

inflation?

 Why might your findings be related to changes in interest rates?

 Why might they not be related to interest rates, i.e., what other factors could explain the 

data patterns you have discovered?

Part IV: Policy Implications

The FDIC, working with other banking regulators, examines and supervises thousands of banks 

for safety and soundness and compliance with consumer protection laws. The FDIC also reviews 

and approves applications for deposit insurance, an important step in opening a new bank. 

Include in your write-up a consideration of the role that the FDIC has in regulating the banking 

sector. The following are examples of questions that your team could analyze in this part of your 

study:

 Should the effects that you have found concern bank regulators such as the FDIC?

 Should any of your findings be met with particular responses from the FDIC? If yes, 

explain your proposed course(s) of action. If not, explain why inaction is the best 

response.

 If the FDIC implemented your policy recommendations, what impact might that have on 

the banking sector? On the economy more broadly?