banks
As interest rates rise, banks face new stress tests
June 17, 2013: 7:04 AM ETBanks are starting to come clean about their rate risks.
B of A recently said it could lose as much as $11 billion if interest rates continue to rise.
FORTUNE -- Banks have mostly been tight-lipped about what rising interest rates would mean for their bottom lines. They will soon have to open up a little more to regulators and investors.
For the first time this year, the Federal Reserve is requiring the nation's 18 largest banks to submit mid-year stress tests, showing how they would perform if they were hit with a negative economic shock, like a spike in unemployment or interest rates. The results are due to the Fed by July 5th. Unlike the bank stress tests conducted at the beginning of the year, though, the Fed will not run its own test, or publicly critique the results. However, the banks will be required to make the results public at the end of September.
Bankers are meeting with Fed officials behind closed doors next week in Boston to discuss the stress tests. There has been some contention over the process in the past. Bank executives have expressed frustration that the Fed won't say how it gets its results. At a similar conference last year, Wells Fargo's (WFC) treasurer, Paul Ackerman, reportedly drew applause from bankers when he said he still didn't get how the Fed's loss estimates could be so different than his bank's.
MORE: Banks will take a hit on refi bust
On the list of topics for this year's meeting are residential loans, corporate loans, and so-called counterparty credit risk, which is how much money a bank could lose if one of its trading partners goes bust. Putting a figure on that is one of the fuzziest parts of stress testing. In the past few months, regulators have stepped up scrutiny of corporate lending, questioning whether banks have made too many "covenant-light" and leverage loans.
But rising interest rates are sure to come up. The yield on the 10-year Treasury bond has been rising recently, after being stuck near historic lows ever since the recession. The Fed included a sharp rise in interest rates as one of the shocks banks could face when it calculated potential trading losses in the stress tests that were released in March. That was the first time the Fed had done that.
What's more, bankers say the Office of the Comptroller of the Currency has recently been questioning banks about interest rate risk. Last year, the OCC included rising interest rates in its report of top risks for banks.
It's hard to know how much banks would lose. Generally, banks have stuck to positives. Higher interest rates would allow the banks to charge more for loans. That could boost lending revenue and profits. But at the same time higher interest rates, and falling debt prices have, in the past, caused big losses for the banks in their bond and loan portfolios. Banks have been less outspoken about that part of the rising interest rate story. But that might be changing.
MORE: Jamie Dimon's $5 billion bet against bonds
At an investor conference last week, Bank of America CFO Bruce Thompson indicated that the bank could lose as much as $11 billion in its bond and loan portfolio if interest rates were to rise 1%. He said that was as much as three times what Bank of America (BAC) would gain from higher rates in its lending business. But the bank might not have to realize those losses immediately, or ever, if it holds the debt and borrowers end up paying. Still, the bank's capital could fall, which is something both investors and regulators have watched closely since the financial crisis, and something that would show up on the bank's stress test.
The best of times, worst of times story banks are telling about rising interest rates could end up being the other way around.
-
The Fed's other trillion dollar problem
The amount of money banks have at the Fed recently reached 13 digits, for the first time ever.
FORTUNE -- U.S. banks now have $1 trillion at the Federal Reserve. It's far more than they have ever had before, and it could be a big problem.
And it's a new one. Before the financial crisis, the amount of cash banks kept idle at the Fed rarely topped $25 billion, which in terms MORE
Stephen Gandel, senior editor - Jun 12, 2013 9:47 AM ETPosted in: banks, Ben Bernanke, bonds, cash, Economy, Federal Reserve, investing, lending, quantitative easing -
Banks will take hit on mortgage refi bust
Another major source of bank profits is on the rocks.
FORTUNE -- Have you called your mortgage broker in a while? If you haven't, you should. And you'll probably get her on the first ring. Being a mortgage broker has suddenly become a lot lonelier.
The number of people looking to refinance their home loan has plummeted recently. According to the Mortgage Bankers Association, the number of borrowers filing refinance applications fell MORE
Stephen Gandel, senior editor - Jun 7, 2013 6:00 AM ET -
A hole in JPMorgan's Dimon defense
To sway shareholders on next week's chairman vote, Jamie Dimon's supporters say focus on the bank's bottom line. They're hoping you will miss some accounting moves that have significantly boosted profits.
FORTUNE -- Jamie Dimon likes to talk about JPMorgan Chase's fortress balance sheet. What's a little more shaky is the bank's income statement.
Next Tuesday, at its annual meeting in Tampa, JPMorgan (JPM) will reveal the results of a shareholder vote MORE
Stephen Gandel, senior editor - May 16, 2013 10:42 AM ET -
FHA's solvency plan isn't fair
The government insurer, which may or may not be in need of a bailout, plans to generate $10 billion by locking middle class borrowers into high fees for decades.
FORTUNE -- This is what you call kicking 'em when they're down.
Consumers who don't have a lot of cash to put down when buying a house usually have to pay a higher rate than typical borrowers for the first few years of MORE
Stephen Gandel, senior editor - May 2, 2013 1:16 PM ET -
Study: Megabanks may disappear
Consultant calls recently proposed banking regulations "weapons of mass destruction."
FORTUNE -- Call it too big to succeed.
A report about the global banking industry by Boston Consulting Group, which was released on Tuesday, says new regulations and less business will force the big banks to dramatically shrink. Of the 28 global banks the consulting firm looked at, only a few of the leading players like -- Goldman Sachs (GS), Deutsche Bank MORE
Stephen Gandel, senior editor - Apr 30, 2013 2:13 PM ET -
What could cause the next financial crisis
It's not clear regulators are taking their own worst case scenarios list seriously.
FORTUNE -- Too big to fail. Interest rates. Borrowing. Fire-sales. The Flash Crash. Risky loan deals. Libor. Cyber attacks. Europe. Japan. China.
Cattle plague was not on the list.
On Thursday, the super council of bank regulators created after the financial crisis put out a list of their best guesses as to what could cause the next financial crisis. The MORE
Stephen Gandel, senior editor - Apr 26, 2013 12:37 PM ET -
Despite cautious talk, banks push risky deals
Citigroup, Goldman Sachs, and Morgan Stanley preach caution, even as their bankers return to pre-crisis deals.
FORTUNE -- On Citigroup's recent conference call, CEO Michael Corbat said he was still worried about the economic recovery and the market.
"Looking ahead, I believe the environment is going to remain challenging," Corbat told his bank's investors. "Europe's issues, as the situation in Cyprus shows, still have the potential to rattle the markets and impact MORE
Stephen Gandel, senior editor - Apr 24, 2013 10:15 AM ETPosted in: banks, Citigroup, collateralized loan obligations, debt, Goldman Sachs, investing, morgan stanley, Wall Street -
Goldman Sachs stays mum on risky assets
Dodd-Frank requires banks to disclose a new measure of the riskiness of their loans and investments. Goldman is the only big bank still refusing to do it.
FORTUNE -- How risky is Goldman Sachs? Don't ask. Executives won't tell you.
On a conference call with analysts on Tuesday to announce first-quarter earnings, which beat expectations but still somehow disappointed, Goldman's CFO Harvey Schwartz was asked about a key measure that tracks how MORE
Stephen Gandel, senior editor - Apr 17, 2013 5:00 AM ET -
Cost of being Too Big to Fail: Now just $28 million
A small Fed tax will do little to rein in big banks.
FORTUNE -- For the big banks, the Federal Reserve's stick remains pretty rubbery.
When Dodd-Frank, the banking reform law passed in the wake of the financial crisis, was originally envisioned, co-author Congressman Barney Frank, members of the Obama administration, and others believed the new rules would encourage banks to shrink by making it too expensive to remain big. That, they MORE
Stephen Gandel, senior editor - Apr 16, 2013 5:00 AM ET
