At the Commerce Street Capital LLC annual bank conference in Las Colinas, Texas on April 8th the take away message was that banks need to evaluate their potential interest rate risk on their balance sheets. The bank’s CEO, Dory Wiley stated that since the sustained period of low interest rates many banks have become more liability sensitive thus squeezing deposit margins and shifting banks to shorten their durations of their portfolios. This type of activity if overdone can expose banks to income losses if rates rise.
As one solution presented were for banks to consider setting caps on loans to avoid borrowers becoming distressed when rates rise, as borrowers’ nature is to be liability sensitive. In Fact approximately 6.80%, or 445, of the 6,540 commercial banks in the U.S. were asset sensitive at Dec. 31, 2010, compared to 13.13%, or 820, of the 6,245 commercial banks in the U.S. at Dec. 31, 2006 as presented by Mr. Wiley. Although the hope for many institutions is that loan demand returns especially when the rates begin to rise but not as fast the 350 bps increased which this occurred after the last credit cycle in 1994.
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