On October 8, 2013, the FDIC published Financial Institution Letter FIL-46-2013 to re-emphasize the importance of prudent interest rate risk management. The FDIC’s tone was sharper than in the Advisory on Interest Rate Risk Management collectively published by the financial regulators over three years ago on January 6, 2010.
The FDIC identifies the nationwide trend of institutions reporting “a significantly liability-sensitive balance sheet position” and says in the letter that it “is increasingly concerned that certain institutions may not be sufficiently prepared or positioned for sustained increases in, or volatility of, interest rates.” That is strong language! The FDIC is clearly signaling its intent to focus intensely on the issue in upcoming examinations.
Some of the FDIC’s specific concerns about banks with a liability-sensitive balance sheets in a rising rate environment include:
- Decline in net interest income;
- Run-off of deposits;
- Rate sensitive liabilities (e.g., deposits) re-pricing faster