Magazine article American Banker

Rate Risks Spur Banks to Cut Exposure

Magazine article American Banker

Rate Risks Spur Banks to Cut Exposure

Article excerpt

Banks learned some hard lessons from being burned by interest rate risks to their investment securities, and they've worked to reduce their exposure, analysts said.

Banc One Corp., PNC Bank Corp., and a number of others suffered lower than- expected earnings in 1994 because they had bet that interest rates would remain low.

Indeed, some analysts estimated that interest rate bets caused more than half of the bank group to underperform. "Banks got very complacent with interest rate risk in 1994," said Dennis Shea, a bank analyst at Morgan Stanley & Co.

"We had steady declines in interest rates for quite a period of time. The easiest thing to do was position yourself for a continued decline." Nonetheless, as a group, banks have reduced that kind of risk because they got "punched in the nose" and they still remember it well, Mr. Shea said.

Moshe A. Orenbuch, a bank analyst at Sanford C. Bernstein & Co. in New York, said banks have cut their average interest rate sensitivity about in half.

They have reduced the gap between assets and liabilities that reprice in 12 months to 0.6% from 1.0% of earning assets, according to research by Bernstein.

Additionally, the standard deviation in interest rate sensitivity has fallen to 4.9% from 5.8%.

That means the riskiest banks "got their acts together," Mr. Orenbuch said.

To be sure, interest rate risk remains a fundamental issue that can affect a bank's balance sheet, causing periodic drops in earnings.

"I don't think as a result of a few banks having problems that the issue is either larger or smaller," said Diane Glossman, a bank analyst at Salomon Brothers Inc. …

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