Despite record commercial bank profits in 1999:IVQ, some indicators suggest increased risk exposure. Banks continue to move toward volatile liabilities, which reprice or mature in less than a year, and away from core deposits, which tend to have greater interest rate stability. These factors indicate increased exposure to interest rate risk. Banks’ holdings of long-term assets continue to rise, implying that earnings from asset holdings are less sensitive to interest rate changes. Overall, such changes in the composition of banks’ balance sheets increase their vulnerability to rising interest rates. Of course, banks can hedge these risks by using off-balance-sheet derivatives, but large spreads on interest rate swaps during 1999 may have discouraged them from using these instruments.
Suggested citation: "Banking Conditions," Federal Reserve Bank of Cleveland, Economic Trends, no. 00-06, pp. 16, 06.01.2000.