Economist: Currently the interest rates that banks pay to borrow are higher than the interest rates that they can rec...

Irina on August 15, 2019

@ash,

The argument is telling us that current borrowing interest rates are higher than the interest rates the banks can charge for loans to large, financially strong companies. Banks will not currently lend to companies that are not financially strong, and total lending to small and medium companies is less than it was five years ago. So total lending is less than it was five years ago.

Let's think about all the potential borrowers in this argument for a minute:

-Large strong companies
-Large weak companies X
-Small & medium strong companies
-Small & medium weak companies X

The banks will not lend to any financially weak company, and the total lending to small and medium companies is down, which means it makes no difference what the proportion of strong v. weak small and medium companies is now versus five years ago. The bottom line is that the total SM lending is down regarding of whether it is because there are less small and medium companies overall, the banks have changed their lending criteria to this type of companies, or small & medium companies were financially stronger five years ago as (B) suggests. (B) could be true but not a MUST BE true assumption for the conclusion to follow logically. Large financially strong companies are the only borrower group remaining that could undermine our conclusion unless we assumed that banks will not lend at interest rates that are lower than the interest rates they pay to borrow as the correct answer choice (A) points out. Then banks only lend to small & medium financially strong companies right now, and we already know that small & medium lending as a whole is down, thus the total lending is down as well.

Does this make sense?

Let me know if you have any further questions.