U.S. Banks Face Interest-Rate Shocks as Economy Mends, OCC Says

The biggest U.S. banks will face interest-rate shocks to their already tight margins in coming years, according to a report from the U.S. Office of the Comptroller of the Currency.

The financial firms can’t be sure what impact the dragged- out period of near-zero short-term rates will have on deposit products until it ends, the OCC said in a report today on risks to the banking industry. It also said future rate jumps could drop the value of the companies’ mortgage securities. With limited loan growth, the banks will struggle to improve net interest margins in the near term, it said.

“After three consecutive years of record low interest rates, banks are unlikely to realize further benefits from lower funding costs,” the OCC said in the report, adding that a return of interest income from future loan growth could be squeezed by higher funding costs.

The regulator of national banks such as those owned by JPMorgan Chase & Co. (JPM) and Bank of America Corp. reported a slowly improving banking industry that still faces many of the same risks it did in its first such report six months ago. The number of banks with the lowest supervisory ratings has continued to drop, partially because the worst of them have failed, the OCC said, and enforcement actions have declined -- even as the agency hit HSBC Holdings Plc (HBC) with a $500 million money- laundering penalty last week, the largest in OCC history.

In the search for new ways to expand lending, the agency cautioned that big banks’ underwriting standards have eroded for such products as leveraged loans over the previous 18 months, and “yields on high-risk assets are at record lows, with risk continuing to rise.”

Future compliance costs and the continuing fallout from compliance failures are also reducing profitability, the report said.

“They face fundamental changes in their business models as a result of weakening revenue growth, including shifts in the role of trading, securitization, and consumer fee income,” the report said of the big banks.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net.

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.