The rise in the level of interest rates adversely affect the market value of both assets and liabilities because revenues from assets (like fixed-rate mortgages) reflect market prices more slowly than the expenses paid on liabilities (like demand deposits), a spike in interest rates could shrink a bank’s margins, making it less profitable.
As interest rates rise, asset and liabilities prices fall because investors can receive a higher return on a risk-free investment. Conversely, as interest rates fall, asset prices rise.
A second reason that asset and liabilities prices will fall when interest rates rise is because the cost of capital increases.
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