WASHINGTON - (05/04/05) -- The Federal Reserve raisedshort-term interest rates again Tuesday by 25 basis points to 3%,in its continued efforts to dampen inflation and economic growth.But the continued rise in short-term rates have had little effectson long-term rates, raising concerns about a continued squeeze oncredit unions and other financial intermediaries. "The risk now isthe inability (of the Fed) to talk up long-term rates," NAFCUeconomist Jeff Taylor, told The Credit Union Journal. He worriedabout the phenomenon known as an inverted yield curve--when shortterm rates are higher than long-term rates. That discourageslonger-term lending and investments because short-term lending andinvesting are more profitable, putting increased pressure on creditunions and other intermediaries. Meantime, Tuesday's Fedaction--the eighth 25 bp hike in the past nine months--is expectedto immediately push up rates for short-term credit union loans likethose for cars and home equity lines of credit, which have risen anaverage of 40 bps and 135 bps, respectively, since the Fed startedits recent rate increasing last June.
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The Cleveland-based bank is projecting steady growth in net interest income even as credit losses remain manageable. But Chairman and CEO Chris Gorman also said that he thinks a recession is likely.
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The first-quarter increase involved commercial real estate loans, including some problematic multifamily loans and an office credit, but none of the criticized loans were to consumers, officials at the Dallas company say. Further CRE deterioration is anticipated.
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The Detroit-based company is exploring ways to make more consumer auto loans without running afoul of stricter capital standards that are expected from the Federal Reserve. Possible approaches include more securitizations and the use of credit risk transfers.
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The House Financial Services Committee also sent to the full House two bipartisan bills, including one that would prevent large banks from opting out of having to recognize Accumulated Other Comprehensive Income in regulatory capital.
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Charge-offs and nonperforming loans rose at the Georgia bank in the first quarter. But it blamed the problem on one large client and said the matter has been resolved.
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Amid healthy first-quarter loan growth and improving credit quality, Discover Financial Services slashed its profits by $800 million to offset remediation costs from a 16-year period when it overcharged certain merchants.
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