Federal regulators are expected to ratchet up the attention they pay to interest rate risk in the banking system amid mounting expectations that the prolonged period of low rates is nearing an end.
Fallout from sharply rising interest rates helped cause the failures of hundreds of savings and loans in the late '70s and '80s. At that time, thrifts primarily held long-term assets — 30-year, fixed rate mortgages — which elevated risk because many were funded with short-term liabilities.
"The challenge is going to be for those banks that are particularly liability-side-sensitive, where their deposits are going to reprice more quickly than their assets," said Sanford Brown, a managing partner at the law firm Bracewell & Giuliani LLP and a former official at the Office of the Comptroller of the Currency.
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While observers said systemwide problems from interest rate risk are not expected this time around, some institutions may have trouble.
Institutions that have emphasized short-term liabilities while holding assets with long-term yields may need to consider balance-sheet changes, according to some observers.
"Over the last 12 months in particular, a lot of banks' balance sheets have seen a worsening of their interest rate position," Musso said. "I would not call it material. It's certainly not like it was back in the late '80s '90s.
"Everybody has been going intermediate and longer-term on the asset side. So you can see the natural course of events would be increasing interest rate risk." The Federal Reserve Board's key short-term interest rate has hovered around zero for well over a year, and the central bank announced a decision last month to keep the rate between zero and 0.25% for an "extended period."
But most watchers are bracing for an end to the ride.
FDIC officials have sounded the alarm over the last few months. A Dec. 17 report noted an increased use of assets with extended maturities. Whereas such assets made up just 24% of the industry's portfolio in 2006, that number was near 40% in June 2009.
A longer version of this article appeared in the Jan. 6 edition of AmericanBanker.
