The chatter about banks and interest rates can be confusing. Bankers talk like they can’t wait for rates to rise and bring relief to net interest margins. Yet regulators and analysts worry banks would be caught unprepared by a sudden shift.
In fact, according to one important measure of interest-rate sensitivity, big banks are aggressively positioned for a jump in rates — but most banks are not as well prepared. (See the graphic below. Interactive controls are described in the captions. Text continues below.)
Assets that would mature or reprice within a year vastly outweighed liabilities with the same shelf life at the typical holding company with more than $100 billion of assets at yearend. The median gap between short-term assets and like-dated liabilities, as a percentage of total assets, equaled 22% for the $100 billion-plus group at yearend, close to the highest level in about a decade. The median for holding companies with $10 billion to $100 billion of assets was likewise high at 15%.
Most holding companies of any size posted asset-sensitive “cumulative gaps” — that is, they reported more short-term assets, which would presumably reprice higher or be replaced by higher-yielding assets because of a rise in interest rates, than short-term liabilities whose cost would increase under the same circumstances.
But the asset-sensitivity gets weaker further down the size spectrum. The median for all holding companies, which closely tracks the median for holding companies with less than $2 billion in assets since the vast majority of banks are small, was just 5.6% at yearend.
Interest rate positioning has swung broadly depending on the rate environment. Banks generally became more liability-sensitive as the Federal Reserve raised its policy rate in the middle of the last decade. The industry reversed course as the central bank began to ease in late 2007. Overall, asset-sensitivity seems like a reassuring condition now that nominal rates, at least, have little room to grind lower.
Large holding companies have achieved greater asset sensitivity than their smaller competitors in part because short-term assets account for a much larger percentage of large holding companies’ assets.
Large companies are also helped a bit by bigger relative holdings of noninterest-bearing deposits, where flows can be particularly volatile but which do not directly affect cumulative gap measures since they do not reprice at all.
A more important factor on the liability side is large banks’ relatively small holdings of deposits that mature or reprice within a year — just 11% of balance sheets at yearend among holding companies with more than $100 billion of assets compared with 24% among holding companies with less than $2 billion of assets.
To be sure, cumulative gap is just one among several standard measures of interest rate risk. All of them are flawed and they can sometimes contradict one another. For example, 1st United Bancorp Inc. (FUBC), a $1.6 billion-asset company in Boca Raton, Fla., said in its annual report that its cumulative gap remains “slightly liability sensitive during a stable rate environment.” In other words, its short-term liabilities exceed its short-term assets, suggesting that a rise in rates would hurt the bank. But a separate simulation of a 100-basis-point increase across the rate curve showed that 1st United’s net interest income would increase by 2.9%.
While cumulative gap figures suggest banks are broadly geared for higher rates, there are signs banks are “reaching for yield” in their securities portfolios. As Fed Governor Jeremy Stein warned recently, the most dangerous risks could be the ones that are hardest to measure.
Editor's note: This story originally used the wrong term for a measure of interest rate risk. The correct term is cumulative gap.