Nov. 10 (Bloomberg) -- Banks are carrying more short-term debt on their balance sheets than at any time in at least 30 years, exposing them to rising borrowing costs that could undermine profits, Moody’s Investors Service said.

About $10 trillion of bank debt will come due between now and 2015, with $7 trillion maturing by 2012, Moody’s analysts led by Jean-Francois Tremblay in New York wrote in a report released today. The figures exclude debt not rated by Moody’s.

Borrowing costs may rise as lenders issue longer-term debt to replace maturing securities and as the Federal Reserve raises its target interest rate from the near-zero level it has maintained for almost a year, the analysts wrote. Banks with high levels of short-term debt are vulnerable to sudden increases in interest rates or “swings in investor confidence” that could increase the cost of capital, the report said.

“While we recognize that U.S. banks were able to issue such substantial amounts of debt in the boom years prior to the crisis, the current environment is fundamentally different and it may be substantially more difficult to raise similar amounts of funds in a cost-neutral way,” the analysts said.

The average maturity of new Moody’s-rated debt sold by banks globally has fallen to 4.7 years from 7.2 years in the past five years, the lowest figure in three decades, according to the report. Banks issued a record $12 trillion of wholesale on-balance sheet debt from 2005 to 2009, the report said.

Wholesale debt refers to on-balance sheet securities and excludes deposits and hybrids that qualify as regulatory capital.

Higher Rates

Banks sold more short-term debt before the credit crisis to cheaply finance assets on their balance sheets and protect themselves from being locked into higher interest rates in the future. When credit markets seized up after the collapse of Lehman Brothers Holdings Inc. last year, the use of government programs with limited maturity guarantees increased the sale of short-term debt, Moody’s said.

“The key question is to what extent these banks will be able to pass on increased funding costs to customers as opposed to being forced to reduce margins or manage down their balance sheets,” the analysts wrote.

Not all banks will be equally sensitive to refinancing risk, the analysts wrote.

“You’ll have winners and losers from that perspective, and that’s why we’re saying that it may become an important credit differentiation factor in the future,” Tremblay said in a Nov. 6 phone interview.

U.S. and U.K.

The trend is especially pronounced in the U.S. and the U.K., Moody’s said. In the past five years, the average maturity on newly issued bank debt in the U.S. shrank by 4.6 years, from 7.8 to 3.2 years, and in the U.K. by 3.9 years to 4.3 years. For all banking systems globally, the average maturity shrank by 2.5 years.

Bank debt maturities are still manageable because interest rates remain low and the U.S. government has yet to fully withdraw the money it lent, spent or guaranteed to revive credit markets and fight the recession, Moody’s said.

“While we expect that most banks will be able to manage the transition well if the economy continues healing and if benchmark rates remain relatively stable, we remain alert to any signal that would suggest that these conditions are changing,” the analysts wrote.

To contact the reporters on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net

Last Updated: November 9, 2009 18:00 EST