Have short-term interest rates gone as low as they can go?
There is no consensus among economists. Some think the Federal Reserve will take short rates down another notch soon. Others think the next big move will be a tightening.
Nor is there agreement among banks on how to structure assets and liabilities in anticipation of rate changes.
Some big banks such as First Union Corp. are standing pat in the expectation that short rates will stay low and continue to fuel healthy net margins.
An Activist Approach
Others, including KeyCorp and Boatmen's Bancshares, have already started restructuring assets and liabilities to prepare for a rise in short rates.
"Rates can't move much farther down," said Lee Irving, senior vice president with KeyCorp, Albany, N.Y. "We think the next big rate move will be upward."
At the start of 1991, KeyCorp's balance sheet was like that of other banks, emphasizing fixed-rate assets and adjustable-rate liabilities. This way, liabilities could be repriced downward when the Federal Reserve cut the target rate for federal funds. That short-term rate is 3%.
But the bank has been getting ready for a rate hike since last month. It has moved to get more assets and fewer liabilities that reprice over three to six months. To accomplish this, Keycorp has pushed variable-rate mortgages and has extended the maturity of some deposits by offering premiums to consumers.
A Safety Valve
"Our position has a cost," said Mr. Irving. "We could have extracted greater profits by maintaining a liability-sensitive posture and by waiting until the last minute to convert to asset-sensitive. If rates stay low, we sacrifice profits."
Boatmen's has switched from a liability-sensitive stance to a neutral one, geared to protect income from rate fluctuations. That's the approach used by other big banks, including Sun Trust Banks, Atlanta; Fleet Financial Group, Providence, R.I.; and First Bank System, Minneapolis.
"From midyear 1992 on, we've thought that we are in the zone of a trough in interest rates," said Phillip E. Peters, executive vice president at Boatmen's. "We anticipate some modest rise in short-term rates in 1993."
Boatmen's has reduced the average maturity of its investment portfolio to 2.5 years. The St. Louis bank also bought interest rate swaps that bring in a variable-rate cash flow, which moves with short-term rates.
No Quick Change Seen
Jerry Schmitt, executive vice president at First Union, agrees that the Fed will eventually raise short-term rates. But until it does, he prefers to make money by operating with liabilities repricing more quickly than assets over the short term.
"We don't expect rates to go up for six to nine months," said Mr. Schmitt. "We'll do better if rates stay level or go down."
Mr. Schmitt said First Union has cut back its rate bet over the past year believing that each time the Fed eased, the bottom for rates drew closer. The bank has significantly shortened the average maturity of bonds within its investment portfolio.