Regulators are warning that years of stubbornly low interest rates and expectations they will remain low for years to come have prompted U.S. banks to shift their balance sheets in ways that put them at risk if rates suddenly spike, Reuters reported yesterday. Banks have been stocking up on long-term loans, often tied to real estate and property development that promise higher yields than the miniscule returns on short-term debt. However, the widening gap between long-term loans and mostly short-term funding means higher interest rates could trap banks in a corner: forcing them to pay more to cover their immediate financing needs than they earn on their loans. The dynamic "raises the interest rate risk issue that we are very focused on," Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation(FDIC), said this week. Banks are broadly positioned according to the signals the Federal Reserve has been sending — that it will lift rates only gradually and spread the increases over a long period. Regulators point out, though, that central banks can move quickly too, even if that now appears unlikely. Short-term rates could also climb in a weakening economy, they say.
