Interest rate risk at commercial banks is climbing, particularly at small banks, say Cleveland Fed researchers
Average interest rate risk in the US banking system has been increasing since the end of the financial crisis, and the increase has been particularly steep at small banks, say Federal Reserve Bank of Cleveland researchers William Bednar and Mahmoud Elamin. While big banks’ interest rate risk exposure is being driven mainly by their liabilities, Bednar and Elamin say at small banks, it is coming from both their assets and their liabilities.
Banks run the risk of losing money if unexpected differences arise between the long-term interest rates at which banks lend and the short-term rates at which they borrow. Using data from bank “call reports” and an economic value model, Bednar and Elamin assess the current level of interest rate risk borne by banks. They find that the average interest rate risk at the 50 largest U.S. commercial banks has risen since 2011, but remains significantly below than the pre-crisis peak. However, the researchers find a much greater increase in interest rate risk at smaller banks, noting a very steep ascent after 2009.
Bednar and Elamin say the uptick in average interest rate risk at the 50 largest banks is being driven by the banks’ liabilities. Looking at big banks’ assets, they say the declining contribution of loans to interest rate risk is being offset by the increasing contribution of security holdings.
At small banks, both liabilities and assets – including both loans and securities -- are contributing to increased interest rate risk.
Bednar and Elamin say banks and regulators need to closely monitor the higher level of interest rate risk, which could be a problem once interest rates start rising.
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Doug Campbell, email@example.com, 513.455.4479