Low Interest Rates and Banks Investments

[chinaco]

The federal govt has been excessively manipulating rates (since the tech bubble burst) over the last decade (too low for too long). It was one of the causes of the meltdown...."Cheap Money"... coupled with relaxed (or little credit scrutiny).

Well, those low rates that we (small investors) are struggling with... apparently has the bank regulators concerned about how banks may be trying to maneuver their fixed investments.

One needs to look no further than the S&L crisis to view the perils of unmanaged asset/liability gaps. Despite being extremely profitable at the time, these institutions failed to manage the risk of funding long-term fixed rate assets with short-term deposits.
Similarly, banks are faced with difficult decisions today as long term assets offer anemic yields, and an abundance of cheap funding abounds (brokered deposits etc..). There are no shortage of banks afraid to be stuck with a long term fixed rate asset (let’s say a 10yr treasury at 3%) with the fear of overnight funding rising dramatically.
This risk has not escaped the FDIC as Sheila Bair said “I do worry that credit quality …needs to be fixed, but the next issue is likely to be interest rate risk”. One banking analyst noted that “Banks have purposely given up current earnings for the ability to not lose money when rates rise”.

Interest Rate Risk: Another Big Threat To Bank Earnings

Isn't this the trap that some of the investment banks fell into during the meltdown. Using short-term debt to fund longer term business needs. Once their viability was in question, no one would lend them short-term money.

 

[Danmar]

interest rate risk is one of the risks banks must manage every day. When I was employed this was one of my responsibilities. Metrics and control processes are well understood and managed at least at larger institutions. (My employer was very large). So I wouldn't worry about the bigger guys. The smaller banks are not as sophisticated but I suspect the regulators would be all over them. the S&L crises was caused to a large extent by interest rate risk and has been a focus ever since. Not many S&L's left anyway. Bottom line is I would be surprised if this became a significant issue.
The most recent crises was more of a liquidity issue. Again, although not as well controlled as interest rate risk, liquidity risk is now much better understood and controlled and has become a focus of regulators

 

[chinaco]

interest rate risk is one of the risks banks must manage every day. When I was employed this was one of my responsibilities. Metrics and control processes are well understood and managed at least at larger institutions. (My employer was very large). So I wouldn't worry about the bigger guys. The smaller banks are not as sophisticated but I suspect the regulators would be all over them. the S&L crises was caused to a large extent by interest rate risk and has been a focus ever since. Not many S&L's left anyway. Bottom line is I would be surprised if this became a significant issue.
The most recent crises was more of a liquidity issue. Again, although not as well controlled as interest rate risk, liquidity risk is now much better understood and controlled and has become a focus of regulators

Yes, they are regulated and have checks and balances. But somehow they still seem to manage to fail.

No one really knows the state of some of those banks since the meltdown. Many are still in a weakened state. Some have held on so far and not been taken over... but how strong are they and what would it take to sink them?

I am sure many of those banks that are holding defaulted loans and loans about to default, that they are looking at any way the can to get a bigger spread!

 

[Danmar]

Yes, they are regulated and have checks and balances. But somehow they still seem to manage to fail.

No one really knows the state of some of those banks since the meltdown. Many are still in a weakened state. Some have held on so far and not been taken over... but how strong are they and what would it take to sink them?

I am sure many of those banks that are holding defaulted loans and loans about to default, that they are looking at any way the can to get a bigger spread!

As I said. i doubt they could get away with this. pretty easy to check by the regulators. My staff had to report this stuff on a weekly basis. if I scewed up or tried to game he regs I would have been fired.

 

[clifp]

As I said. i doubt they could get away with this. pretty easy to check by the regulators. My staff had to report this stuff on a weekly basis. if I scewed up or tried to game he regs I would have been fired.

Did you work for Canadian bank? Just asking cause my impression is the Canadian banks were better managed/regulated than American.