INTEREST RATE RISK: A WINDING ROAD

INTEREST RATE RISK:
A WINDING ROAD
14th Annual Regional & Community Bankers Conference
November 10, 2015
Michael Ravid
Director of Regional and Community Supervision
Federal Reserve Bank of Boston
INTEREST RATE RISK:
Decision Criteria
• 2011
• 2015
• Balance Sheet Trends
• The Road Ahead
Source: FDIC
All FD R&C Banks - NIM vs. ROA (not YTD)
5.50
1.30
1.10
5.00
0.90
4.50
0.70
ROA
NIM
0.50
4.00
0.30
3.50
0.10
-0.10
3.00
-0.30
2.50
-0.50
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1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142015
Fed Funds Increasing
NIM
ROA
2011 Decision Factors
• GDP: Modest but Increasing
• Inflation: Minimal
• Monetary Policy: Low Rates
2011 Monetary Policy
• “Four years of 3 percent inflation [2004-2007] may not have been the
worst of all possible outcomes, but I do not consider it a success. I
hope we do better this time. In particular, I believe we need to heed
the lesson of the last recovery that inflation is capable of rising even if
the level of economic activity has not returned to its pre-recession
trend.”
Jeffrey M. Lacker, President, FRB Richmond, April, 2011
• “First, barring a sustained period of economic growth so strong that
the economy's substantial excess slack is quickly exhausted or a
noteworthy rise in inflation expectations, the outlook implies that
short-term interest rates are likely to remain unusually low for “an
extended period.” The economy can be allowed to grow rapidly for
quite some time before there is a real risk that shrinking slack will
result in a rise in underlying inflation.”
William C. Dudley, President, FRBNY, February, 2011
TODAY
FOMC Projections of Change in Real GDP
September 2015
3.0
2.5
%
2.0
1.5
1.0
0.5
0.0
2010
2011
2012
Actual Change in Real GDP
2013
2014
Central Tendency
Source: FRED, FOMC September 17, 2015 Press Conference- Projections Materials
2015
2016
2017
Range of Projections
2018
Longer run
Median
FOMC Projections of PCE Inflation
September 2015
3
2.5
%
2
1.5
1
0.5
0
2010
2011
Actual PCE inflation
2012
2013
2014
Range of Projections
Source: FRED, FOMC September 17, 2015 Press Conference- Projections Materials
2015
2016
2017
Central Tendency
2018
Longer run
Median
FOMC September, 2015 Fed Funds Target Levels
Source: Federal Reserve Open Market Committee September 17, 2015 press conference materials
What to do?
• Let’s run through some of the things we looked at to
assess whether some strategies might present higher risk.
FRB Tools
Q2 2015 First District - EVE vs. EAR Results
(Up 200 b.p. Scenario)
25
20
15
5
0
Earnings at Risk (EAR)
10
(5)
(10)
(15)
(20)
(45)
(40)
(35)
(30)
(25)
(20)
(15)
(10)
Economic Value of Equity (EVE)
(5)
0
5
10
15
New England Balance Sheet
Structure and Trends
• Long-Term Assets
• Commercial Loans
• Residential Loans
• Nonmaturity Deposits/CD Funding
• Long-Term Investments
• FHLB Borrowings
Long Term Assets / Total Assets
FD Banks with Assets < $10 bil
50%
45%
40%
Share of Total Assets
35%
30%
25%
20%
15%
10%
5%
0%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
(LT Assets / Total Assets) vs. NIM
5.50
Year 1: 3Q04 – 2Q05
Year 2: 3Q05 – 2Q06
5.00
Year 3: 3Q06 – 2Q07
Year 4: 3Q07 – 2Q08
Average NIM
4.50
4.00
3.50
3.00
2.50
2.00
0.00
0.10
0.20
0.30
0.40
0.50
Average LT Assets / Total Assets
Year 1
Year 4
0.60
0.70
0.80
Residential Loans / Total Loans
FD R&C Banks with Assets < $10 bil
60%
50%
Share of Total Loans
40%
30%
20%
10%
0%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Long-Term Investments / Total Assets
FD Banks with Assets < $10 bil
14%
12%
Share of Total Assets
10%
8%
6%
4%
2%
0%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Commercial Loans / Total Loans
FD Banks with Assets < $10 bil
60%
50%
Share of Total Loans
40%
30%
20%
10%
0%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Deposit Funding / Total Funding
FD Banks with Assets < $10 bil
70%
60%
Share of Total Funding
50%
40%
30%
20%
10%
0%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2004
2005
2006
2007
2008
Time Deposits
2009
2010
2011
Nonmaturity Deposits
2012
2013
2014
2015
FHLB / Total Funding
FD Banks with Assets < $10 bil
14%
12%
Share of Total Funding
10%
8%
6%
4%
2%
0%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Annual Percentage Growth - FD R&C Banks
50%
40%
30%
20%
Year 1: 3Q04 – 2Q05
Year 2: 3Q05 – 2Q06
Year 3: 3Q06 – 2Q07
Year 4: 3Q07 – 2Q08
10%
0%
-10%
1 to 2
2 to 3
3 to 4
NET INTEREST INCOME
1 to 2
2 to 3
3 to 4
TOTAL INTEREST INCOME
1 to 2
2 to 3
3 to 4
TOTAL INTEREST EXPENSE
Annual Percentage Growth - US R&C Banks
50%
40%
30%
20%
10%
0%
1 to 2
2 to 3
3 to 4
NET INTEREST INCOME
1 to 2
2 to 3
3 to 4
TOTAL INTEREST INCOME
1 to 2
2 to 3
3 to 4
TOTAL INTEREST EXPENSE
Earnings and Capital
Up200 Impact to ROAA
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
ROAA
Mar-14
Jun-14
Up200 ROAA - Yr 1
Sep-14
Dec-14
Mar-15
Jun-15
Up200 Impact to Tier 1 Leverage Ratio
11.50
11.40
11.30
11.20
11.10
11.00
10.90
10.80
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
T1 Leverage
Mar-14
Jun-14
Up200 T1 Leverage
Sep-14
Dec-14
Mar-15
Jun-15
Up200 Impact to ROAA
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Dec-12
Mar-13
Jun-13
Sep-13
ROAA
Dec-13
Mar-14
Up200 ROAA - Yr 1
Jun-14
Sep-14
Up200 ROAA - Yr 2
Dec-14
Mar-15
Jun-15
The Road Ahead
What is next?