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Press Release

Cleveland Fed researchers assess health of banks - large, small, and regional

Since the end of the financial crisis, banks have been steadily increasing their exposure to interest rate risk, but large and small banks are doing so in different ways, say Federal Reserve Bank of Cleveland researchers William Bednar and Mahmoud Elamin

At small banks, interest rate risk has risen well past pre-recession levels. The increased exposure comes from a dramatic increase in the maturities of small bank assets -- both loans and securities – and a decline in the maturities of liabilities, a worrisome combination, according to the researchers.

At big banks, interest rate risk has not yet reached pre-recession levels, and there has been only a slight uptick in the maturity of loans and securities. But liability maturities have gotten shorter.

Banks cannot avoid exposure to interest rate risk—banks loan money out for long periods and finance those loans with short-term borrowing such as demand deposits. But if interest rates fluctuate unexpectedly, banks can lose money. So managing the interest rate risk inherent in this mismatch is critical to bank survival, say the researchers.
Bank regulators also watch interest rate risk carefully, because interest spikes can affect the entire financial system if banks are overexposed, as happened in the 1980s with the savings and loan crisis.

Read Interest Rate Risk and Rising Maturities

Although bank net income is now beyond where it was before the financial crisis, Federal Reserve Bank of Cleveland researcher Mahmoud Elamin says the crisis has affected the income-generating capacity of large and small banks differently

Since the end of the financial crisis, net income has been increasing at banks both large and small, and net noninterest income has transitioned to a lower level. (Net noninterest income is income from banks’ noninterest revenue-generating activities, like trading and fees, minus noninterest costs, like salaries and benefits.)

The trends in net interest income, on the other hand, differ based on bank size, says Elamin. At large banks, net interest income has plateaued, while at small banks, it continues on an upward trend uninterrupted by the crisis. (Net interest income is roughly what the bank makes off the difference in interest between what it borrows and what it lends.)

From the upward trend in the sum of net interest and noninterest income at small banks, Elamin deduces that the crisis did not have a material effect on the income-generating process of those institutions. But large banks’ income generation seems to have stalled, says Elamin. He notes that most of the action seen in net income is missing from the sum of net interest and noninterest income. Elamin says this shows that transient changes in provisioning for loan losses may be the driver behind the net income increase at large banks.

Read Banks’ Ability to Generate Income After the Crisis

Loan portfolios at regional banks may have become less risky, say Federal Reserve Bank of Cleveland Fed researchers Vinod Venkiteshwaran and Patricia Waiwood

Regional banking organizations (RBOs) -- generally considered to be bank holding companies with between $10 billion and $50 billion in assets -- operate in all 50 states, and in 2012, were responsible for more than $1.7 trillion in lending. To assess the health of RBO loan portfolios, Venkiteshwaran and Waiwood analyzed regional banks’ net charge-off behavior over the past two years.

Net charge-offs are the difference between loans that have been deemed uncollectable and written off the bank’s balance sheet (charge-offs) and any subsequent recovery of those loans. According to Venkiteshwaran and Waiwood, net charge-offs are often used as a proxy for bank risk because they tend to increase with riskier lending activities.

The researchers’ analysis shows that regional banks have been writing off increasingly smaller amounts of loans over the past couple of years, and that net charge-offs have become less concentrated in particular loan categories. By this one measure, at least, the researchers say the evidence suggests that regional bank loan portfolios may have become less risky.

Read Regional Bank Health: Trends in Net Charge-Offs

In addition, Bank research analyst Amanda Janosko looks at fluctuations in the Cleveland Fed’s Financial Stress Index over the third quarter of 2014

Read Tracking Recent Levels of Financial Stress

And if you missed it last week, a Cleveland Fed study says flaws in regulatory design contributed to the erosion of lending standards and ultimately, the financial crisis

Read A Gap in Regulation and the Looser Lending Standards that Followed

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.

Media contact

Doug Campbell,, 513.218.1892