August 6, 2013

FDIC urges urge banks to prepare for eventual effects of higher interest rates

Sooner or later, interest rates will rise.

Sooner or later, interest rates will rise.

And the Federal Deposit Insurance Corp. wants banks to be prepared for that eventuality.

On Tuesday, the agency that insures bank deposits notified banks it had prepared a video to provide them assistance on preparing for and managing interest rate risk.

“What is low now will eventually be high later, so we want to make sure institutions are aware of it,” FDIC spokesman Greg Hernandez said Tuesday.

Hernandez added that the video was part of the agency’s ongoing education about interest rate risk – education that he noted the FDIC began in 2010.

“The former chairman of the FDIC raised the subject back then, and the current chairman continues to do so as well,” he said.

The big concern about interest rate risk is monetary loss. If a bank doesn’t manage its interest rates, it could end up losing money from making low-interest loans while paying higher interest on certificates of deposit.

“It is a concern, obviously, if you have mismatched your assets and liabilities, you are going to have some … potential losses,” said Steve Carr, president of Community Bank of Wichita.

Carr said that to manage interest rate risk, his bank checks its assets and liabilities monthly and puts its investment and loan portfolios through a “rate shock” to test the effects of climbing interest rates on its bottom line. It’s something that he said many banks do.

Carr said his bank also has been careful to not get locked into loans with rates that are fixed and terms longer than five years. Rather, a lot of Community Bank’s loans are on adjustable rates over three- and five-year terms, where officials can reprice a low-interest loan more easily in a rising interest-rate environment.

Another means to managing interest rate risk is to strategically offer certificates of deposit with longer terms that pay a higher interest rate in a rising-rate environment.

Done correctly, banks can sometimes increase the spread between the interest rates they are paying on CDs and the rates they are charging on loans and thereby improve profitability, he said.

As for rising interest rates, Carr said he has yet to see hints of a broad increase. “I don’t know that anybody has that crystal ball,” he said.

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