It’s no wonder banks are still tightening lending policies, despite urging from President Obama to expand credit access to small businesses. The banks keep getting warnings from regulators about “interest rate risk,” or IRR.
The Federal Reserve, the Federal Deposit Insurance Corp. and other regulators want the three initials ingrained in the minds of bank executives overseeing risk exposure, particularly as interest rates are poised to move up in coming months.
Last week, the regulators issued an advisory on the topic.
More telling is an article published last month in a publication from the FDIC. The title: “Nowhere to Go but Up: Managing Interest Rate Risk in a Low-Rate Environment.” The article outlined much of what is in the advisory on IRR.
Last month marked the first anniversary of the record low Federal Funds rate, 0.0-0.25 percent. But most analysts agree that the Federal Reserve will likely nudge rates upward, possibly later this year, if the economic recovery becomes more sustained and widespread.
Recent FDIC findings “suggest financial institutions are becoming increasingly liability sensitive and, therefore, more exposed to increases in interest rates,” the article said.
The biggest risk, the FDIC asserts, is higher volumes of long-term mortgages which are making small- and medium-sized banks more vulnerable to risks when interest rates shift higher. This trend of the last several quarters has been prompted by significant reductions in commercial and development loans – a precarious sector rife with increasingly failing loans.
“For almost 20 percent of banks, longer-term assets comprise more than half of assets,” the FDIC said. “This is up from 2006, when longer-term assets made up the majority of assets at only 11 percent of banks.”
This week’s advisory warned that “material weaknesses in risk management processes or high levels of IRR exposure relative to capital” may require corrective action by regulators. Those actions could include requiring banks to raise additional capital, strengthening IRR management expertise and reducing levels of IRR exposure.
