U.S. banks face potential risks from a jump in interest rates, said Sheila Bair, the former chairman of the Federal Deposit Insurance Corp.
“I’m a little worried about interest-rate swaps,” Bair said today in an interview with Tom Keene on Bloomberg Television. “They’ve never really been through this kind of a volatile environment before. Everybody says they’re hedged, let’s hope so.”
U.S. banks, which are set to report second-quarter results in the next couple of weeks, have been adjusting to a jump in the 10-year U.S. Treasury note’s yield to as high as 2.61 percent on June 25 from 1.63 percent on May 2. Higher rates may allow banks to charge more for loans, which could improve their net interest margins, Bair said.
“A lot of that will depend on how fast their deposits reprice as interest rates go up,” she said. “If their funding cost goes up faster, that could be a problem.”
Benchmark short-term borrowing rates, such as the Federal Reserve’s Fed Funds rate, have remained near record lows.
A jump in rates could also mean banks will face losses on their portfolios of debt securities, analysts including Paul Miller at FBR Capital Markets have said.
“You need to look at what kind of securities, how many, the duration and yield of their longer-dated securities,” Bair said. “Who’s exposed here and who isn’t?”
The Fed today approved a new set of capital standards to bring U.S. banks in line with Basel’s global requirements. U.S. regulators are “very close” to proposing a new minimum leverage ratio for the eight most systemically important banks that would exceed the 3 percent requirement set by the Basel Committee on Banking Supervision, Fed Governor Daniel Tarullo said today.
“My guess is the regulators are going to move to propose a much higher leverage ratio,” Bair said. “I have suggested we need an 8 percent tangible common equity to total non-risk weighted assets measure.”