16
Wisconsin Community Banker
November/December 2014
Staying Ahead of the Regulatory/Interest Rate Cycle
Ajay Ganju, CFA; Kent Musbach, and
Brett Patten of The BOSC Institutional
Strategy Group, BOKF, NA/BOSC, Inc.
T
his article relies on recent federal
agency reports to suggest action-
able ideas that community bankers
can use to prepare for the next exam
and interest rate cycle.
The Office of the Comptroller of
the Currency recently released the
Semi-Annual Risk Perspective from its
National Risk Committee. The report,
based upon year-end 2013 data,
details the key issues the OCC sees
facing the industry as a whole. In this
article, we focus briefly on the earn-
ings and interest rate risk components
noted in the report.
The OCC document comes on the
heels of the FDIC Supervisory Insights
publication which, in part, reported
an increasing number of items related
to interest rate risk that require board
attention. We traditionally have
viewed these reports and similar
publications from the Federal Reserve,
as a meaningful blueprint for what
future examination cycles could focus
on. Dissecting these publications for
parallels to specific issues impacting
your bank can serve as a step toward
confident exam preparation.
Earnings Pressure and the Rate
Forecast Backdrop
The stubbornly slow economic
recovery was difficult to diagnose
early after the recession ended in
2009. The corresponding prolonged
period of very low interest rates has
confounded economic forecasters for
the better part of five years.
For example, according to the Blue
Chip Financial Forecast in July 2009,
expectations for the Fed Funds rate
two years out (2011) was a whopping
3.26 percent. Contrast that with the
current forecast for a 1.80 percent Fed
Funds rate in 2016. This misdiagnosis
early on in the recovery had the effect
of tamping down the willingness of
many banks to extend three- to five-
year fixed rate loans or add long-term
assets to the investment portfolio —
both common practices today.
On the liability side, depositors,
too, have been unwilling to tie up
funds beyond 12 months, resulting in
ballooning non-maturity deposit bal-
ances across the industry.
The depositor, having missed the
opportunity to lengthen deposits, is
likely to stay short for the foreseeable
future, while the banker has no such
luxury with non‐interest expenses to
cover and capital to deploy.
This is precisely one predicament
that the OCC points to in the key risks
facing community and midsize banks
today. Persistently low rates and a slow
growing economy have led to an era
of incremental lengthening of assets,
loosening of lending standards, and
short‐term retail deposits. In addition,
the tailwind of minimal loan loss pro-
visions or even reversals will not likely
continue as regulators appear focused
on loosening credit standards and may
lean toward increased provisioning.
Interest Rate Risk
The OCC has stated it will be
incumbent upon each bank to “accu-
rately identify and quantify” rate risk
on both sides of the balance sheet.
Specifically, they have called out
non-maturing deposits and invest-
ments. This, however, is by no means
the beginning and end. The process
under which rate risk is determined is
expected to be under review as well.
Growing non-maturity deposit
balances, in particular, have captured
regulatory attention. At the same
time, the industry grapples with
ascertaining reasonable assumptions
for the future lives of those deposits.
Amongst the difficulties in document-
ing appropriate assumptions is the
absolute low level of interest rates and
the lack of a historical benchmark for
a half decade of very low, flat rates.
Community and midsize banks
should enact a process to develop
institution-specific histories of
non-maturity deposit account dura-
tions. Continually tracking specific
groups of accounts over specified time
From left: Sydney Rasmussen, Jessica Anderson, and Anna Peterson in front of the
mural they helped to create.
Photo by Hal Kravig
Students Design Bank Mural
UNION GROVE—Under the leadership of Hal Kravig, art instructor, stu-
dents from Union Grove High School recently painted a creative fall mural
on the windows of Community State Bank’s Motorbank facility.
