Banks could be tested by surprise upheaval like recent Brexit vote, OFR says

Banks could be tested by surprise upheaval like recent Brexit vote, OFR says

Regulators warned that years-long stubbornly low interest rates and expectations that are likely to stay low for upcoming years, have prompted the US banks to move their balance sheets in ways putting them in danger in case rates spike all of a sudden.

Banks have been stocking up on lasting loans, mostly linked to real estate and property development that assure higher results in comparison to the miniscule profits on short-term debt.

But, the increasing gap between long-term loans and often short-term funding is an indication that higher interest rates may corner banks. This means, the banks could be forced to pay much more to cover their instant financing requirements than what they make on their loans.

This week, Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation (FDIC), said that the dynamic increases the interest rate risk problem, towards which they are quite dedicated.

The positioning of banks is broadly done as per the signals send by the Federal Reserve. The Federal Reserve said that it will lift rates step by step only, spreading the increases over a long period.

Regulators pointed out that central banks can take quick moves also, though it looks quite unlikely at present. They said that short-term rates may also go up in a weakening economy.
Gruenberg added that there may be impacts on the economy besides monetary policy.

According to the Office of Financial Research (OFR), an independent watchdog within the Treasury Department, said that banks could come across a surprise upheaval such as the recent Brexit vote.

In a report lately, the OFR wrote, “Investors (are) open to heavy losses from large jumps in interest rates, whether from surprises in the Federal Reserve's monetary policy or other shocks”.



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