A Federal Deposit Insurance Corp. report Thursday urged institutions to defend against interest rate risk as the economy begins to recover.
The report, part of the FDIC's "Supervisory Insights" publication, said interest rate risk appears to be on the rise as institutions use noncore funding and higher loan volume to offset losses. Though this strategy helps profits under the currently low short-term rates, the agency said banks may suffer when rates return to normal.
"Evidence suggests that more financial institutions … are taking on higher levels of interest rate risk at a time when short-term rates are near historic lows, which could leave them significantly exposed to changes in interest rates," three FDIC officials wrote in the report.
The publication also explored how institutions can earn Community Reinvestment Act credit despite the economic challenges facing borrowers and outlined measures to protect sensitive customer information.
The report on interest rate risk said that, though the Federal Reserve has kept short-term rates low to help the economy through the crisis period, "it is widely expected that, as the economy recovers, short-term interest rates will eventually return to more normal levels."
The authors reminded institutions about earlier guidance on strategies to assess and mitigate rate risk, including earnings simulations to show the effect of rate changes on income.
