Fixed-rate loans are loans made at pre-set interest rates that don’t adjust over time to take into account prevailing economic conditions and realities. Fixed-rate loans may lead to a grave mismatch of assets and liabilities of a lending bank. This would leave banks exposed to the risk of higher interest rates.

If interest rates increase, not only will banks have to pay their depositors more, but they will earn a higher rate on the floating rate loans they would otherwise make (instead of fixed-rate loans). The risk of rising interest rate is then transferred to the borrowers.