Rise in Banks’ Fixed-Rate Long-Term Lending Could Be Risky
Rise in banks’ long-term lending
According to the FDIC (Federal Deposit Insurance Corporation), the proportion of long-term fixed-rate lending by US banks (C) (JPM) has risen in the past few years. The long-term, fixed-rate lending generates higher interest income for banks (XLF). However, the sharp rise in interest rates could substantially hurt banks, as they might have to pay higher rates on customer deposits than the lending rates, which affects net interest margin.
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FDIC data suggests that US banks (GS) (BAC) couldn’t change the terms of about $6.1 trillion worth of loans for more than three years. These loans make up around 36% of banks’ total assets, the most in two decades. The sharpest rise was seen in assets like mortgage-backed securities that mature after 15 years. Their proportion now stands at almost 13% of the industry’s overall balance sheet compared to 6% in 1998. The FDIC highlighted that smaller banks are more vulnerable to interest rate risk because half of their assets matured or repriced in three or more years.
US banks had a solid third quarter
According to the FDIC, the third quarter was another solid quarter for US banks in terms of revenue, profits, and loan growth. FDIC data suggests that in 3Q17, industry-wide net income was at $47.9 billion, up 5.2% year-over-year. However, it also mentions a slowing loan growth rate, which is a function of demand rather than supply.
Parametric insurance gaining ground
The US insurance market is witnessing rising interest in parametric insurance as extreme weather conditions often lead to catastrophic losses. Parametric insurance covers events like earthquakes of a certain magnitude or hurricanes of a certain strength. Payments, which are agreed upon prior to the event, are made if the event fits the parameters.