Banking Practice Exam

The correct choice is related to the fundamental mechanisms of how banks earn income through interest rates. When there is an increase in interest rates on loans, banks can charge borrowers more for the money they lend. This directly enhances the interest income earned on outstanding loans, which constitutes a significant portion of a bank's revenue.

As the bank raises the interest rates on loans, while the rates on deposits may not necessarily rise at the same pace, the spread between the interest earned on loans and the interest paid on deposits widens. This spread is crucial for net interest income, which is the difference between the income generated from interest-bearing assets (like loans) and the expenses associated with paying interest on liabilities (like deposits). Consequently, an increase in loan interest rates is typically a primary driver in boosting a bank's net interest income.

In contrast, while a rise in interest rates on deposits could lead to higher expenses for the bank, it would not enhance net interest income in the same way. A decrease in operating expenses can improve profitability but does not affect the core interest income. Lastly, an increase in non-interest income, such as fees and service charges, may contribute positively to a bank's overall income but does not directly relate to net interest income, which is precisely