Good News on Jobs Might Spur Change in Funding Strategies
If an employment report due Sept. 6 shows higher job levels, it may persuade some bank executives to curtail a funding strategy pinned to falling interest rates.
That strategy, known as short-funding, has been popular for most of 1991. But with interest rates now at their lowest levels in 10 years, good economic news may be a sign that rates won't go much lower.
"Banks will be paying very close attention [to the economy] in the next couple of weeks, particularly to the employment report," said John Ross, head of funding at Bank of New York.
Monday's Drop Is Discounted
Mr. Ross minimized the sharp drop in rates early Monday in response to the coup in the Soviet Union. Unless civil war breaks out, he said, the turmoil will not have a lasting impact on the U.S. economy.
Short-funding entails a deliberate mismatch of some assets and liabilities. Banks short-fund when they borrow at shorter maturities than they lend.
That can be lucrative as long as rates are declining, because interest charges fall while interest income remains the same. But it is also a risky path, as thrifts learned in the late 1970s when 30-year mortgages were paying 6% while short-term interest rates edged toward 20%.
These days, bankers guard against such catastrophes by restricting their exposure and watching for signs that the economy is heating up, such as improved employment reports.
As soon as bankers suspect that interest rates have stopped falling, it is time to start backing away from short-funding, by lengthening maturities on borrowed funds.
Currently, Chase Manhattan Corp., Bank of Boston Corp., and Bank of New York are among the banks that are said to have short-funded portions of their balance sheets. However, a number of other big banks also are reviewing their strategies, said Michael DeStefano, vice president of financial institutions at Standard & Poor's Corp.
The degree to which these banks are short-funded is hard for outsiders to assess. However, Mr. DeStefano said he knows of one regional bank that has 30% of its assets maturing in a year being funded with liabilities of smaller maturities.
"I think there has been a tendency to open up a gap [between the maturities of assets and liabilities]," he said. "What we've seen recently is an attempt to close that gap."