Banks Face Uncertainty in 2007

A fast-falling housing market risks boosting defaults on debt repayments and force banks to write off bad loans and/or lift their reserves for such loans.

Banks make money by borrowing at what are normally cheaper short-term interest rates to lend at normally richer long-term rates, with the profit making up their net interest margin.

Many banks have adjusted their balance sheets to the rate environment by trying to cheapen their sources of funding, such as low-cost customer deposits or wholesale borrowing, and by selling non-performing long-term assets.