24 HќќѠіђџȱ юћјђџ юћѢюџѦȱ2014 DIRECTORS / SENIOR MANAGEMENT The banking environment: As we move into this new year, the U.S. economy continues to plod along at a slow and steady pace. Things ȱĴȱĴǰȱȱ Ȃȱȱȱ from where we were before the Great ȱǯ Meanwhile the banking landscape has improved markedly, as earnings clocked 16 consecutive quarters of ¢ȬȬ¢ȱǯȱ ȱȱ assets remain below pre-recession levels, but they are higher than a year ago and comfortably above 1 percent. Much of the improved performance comes from healthier asset quality. Loan losses have declined to levels not seen since 2007, and provisions have fallen nearly 40 percent. All of this is good news, but make no mistake; banks face a multitude of challenges ahead. Spotlight on interest rate-risk. Not the least of these challenges is that of potential interest-rate risk ǻ Ǽǯȱ ¢ȱȱȱȱ ȱȱ ȱȱȱȱȱȱ examiners, as evidence suggests that ¢ȱęȱȱȱȱ on higher levels of interest-rate risk. Balance sheets have changed noticeably in recent years, as loan demand has been weak, and shortterm rates have hugged historic lows. ȱȱȱȱę¢ȱ exposed to a sustained increase in interest rates. ȱ ȱ ȱȱ ȱ ȱ Insurance Corp. released a Financial ȱ Ĵȱȱ¢ȱȱ market risk. Simultaneously the Ĝȱȱȱ ȱȱȱ Currency conducted a webinar to ȱȱ ȱȱȱȱ most important. There is a consensus among regulators that the essential risk for banks stems from long-term (or high-duration) assets funded by non-maturity deposits that have surged into bank balance sheets in ȱ ȱȱȱ ȱ ǯȱ ȱĚ¡ȱȱȃȱȄȱȱ regulators concerned about the potential for fast-rising interest expense from rate-sensitive liabilities. At the same time, asset values could come under greater pressure than in past rate cycles, because ěȱȱȱ¢ȱǯȱ The price risk of some investment ȱȱȱę¢ȱ in the past few years, due to lengthened maturities, options risk and declining yields. Management tools. The regulatory concerns should cause bank managers to ponder several questions about the reporting tools that they have at their disposal: 1. ȱ ȱȱȱȱȱ securities depreciation relative to capital in a rising-rate environment? 2. ȱȱ ȱȱȱȱȱ value of regulatory and risk-based capital ratios, as well as simple equity capital? Interest-Rate Risk: A Priority for 2014 JEFFREY F. CAUGHRON The Baker Group LP яќѢѡȱѡѕђȱ Ѣѡѕќџ ě¢ȱ ǯȱ ȱȱȱȱ ȱ ȱ Baker Group LP, Oklahoma City, and works as a market analyst and portfolio strategist. He has ȱȱęȱȱȱȱȱ industry for more than 20 years. Caughron’s trading experience includes several years on the Treasury desk for an international bank on Wall Street and subsequent positions trading mortgage- ȱȱȱȱ¡ȱę¡Ȭȱ products for regional broker/dealers. Additionally he managed a $600 million investment portfolio ȱȱȱȱęȱǯȱ ȱȱȱ numerous articles on risk management topics and frequently is quoted ȱȱęȱǯȱ ȱȱȱȱ¢ȱȱȱ ȱ ȱ for Community Bankers and the Bank Operations Institute. The author can be reached at 800-937-2257, email: jcaughron@gobaker.com. The ȱ ȱȱȱ ȱ ȱ ȱȱȱ ȱ ȱ Association and an IBA Preferred Service Provider.
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