Wednesday, January 6, 2010

The Coming Boomerang Effect Will Squeeze Some Banks

Mike Dunton, senior bank exec, emails me about the coming "boomerang effect":
Bob, This is a significant risk being discussed here. The FDIC may need that 3-years worth of pre-paid premiums more than you think!
He then links to an American Banker story which says:
With rock-bottom interest rates expected to begin rising soon, regulators and industry representatives are increasingly concerned about institutions' ability to weather a boomerang effect on their funding costs.

The abnormally low rates have allowed banks to expand their balance sheets, but fueled worries that some institutions with heavy use of short-term funds may be caught flat-footed when interest rates go up.

"It's becoming a larger and larger threat as every day goes by," said Donald J. Musso, the president and chief executive of the consulting firm FinPro Inc.

Federal regulators are expected to address the issue in a joint release as early as today, and the Federal Deposit Insurance Corp. is planning a conference devoted to interest rate risk management for Jan. 29...While observers said systemwide problems from interest rate risk are not expected this time around, some institutions may have trouble.

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