What's a banker to do? The outlook for interest rates is anything but clear, and bankers' recent unsavory experiences with rates have them highly tentative about investment strategy. Earlier this year, a number of banks were caught napping when money tightened and interest rates rose. They may have become accustomed to a gentle environment: February's action was the first tightening of money since 1989, and in 1993, money policy had been consistently accommodative.
Some bankers will tell you that the timing could not have been worse, because brand new accounting rules made rising interest rates especially costly. The rule, Financing Accounting Standard 115, compelled many banks for the first time to deduct from their capital accounts the unrealized bond portfolio losses caused by rising rates. Also, mounting rates shut down lucrative mortgage refinancing activity and ravaged the values of certain mortgage-backed security holdings.