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FRBSF WEEKLY LETTER Number 93-26, July 23, 1993 Interest Rate Risk at U .5. Commercial Banks During the past few years, the composition of commercial banks' asset portfolios has changed dramatically. Most notably, holdings of securities have grown over 35 percent since the beginhing of 1990, while loans to businesses have actually declined over the same period. Some observers argue that if increases in bank securities holdings are concentrated in longerterm issues, then these portfolio shifts may expose banks to increased interest rate risk, especially if rates rise rapidly. position in that category that would result from a shock to interest rates. Netting risk-weighted assets against risk-weighted liabilities, regulators can determine how much a bank's net worth would change in response to a given parallel shift in interest rates. Under the Fed's proposal, banks may be required to hold more capital against interest rate risk if their risk exposure is considered to be "excessive:' (For a more detailed description of an earl ier, but similar, interest rate risk measure, see Weekly Letter 92-39.) Unfortunately, it is difficult to assess the interest rate risk exposure of the banking system without detailed information on the maturity and cash flow characteristics of bank assets and liabilities. Federal banking agencies have proposed systems to measure this risk, but the data needed to derive these measures are not yet available. My measure of bank interest rate risk is based on the March 1993 version of the Fed's proposed methodology. However, several compromises were required because banks currently do not report sufficient information to derive the Fed's interest rate risk measure. First, limited maturity data are available from 1988.Q4 on bank holdings of fixed and floating rate loans, securities, and large CDs in each of four time-to-maturity bands. The Fed's proposed risk measure uses seven time bands. These data are the basis for my interest rate risk calculations. u.s. In this Weekly Letter, I provide a preliminary assessment of the interest rate risk of commercial banks using data that are currently available in bank Call Reports. While the measure I derive is incomplete, it does suggest that some of the concerns about bank interest rate risk may be overstated. u.s. Methodology and assumptions As part of an ongoing effort to assess bank interest rate risk, the Federal Reserve Board has proposed a risk measurement system that is to be implemented beginning in 1994. Under this proposal, banks will provide detailed data on the maturity and cash flow characteristics of their assets and liabilities. Based on these features, one set of risk weights will be assigned to liabilities, and one set will be assigned to each of three categories of assets: amortizing, nonamortizing, and deep discount. Holdings in each category will be multiplied by the appropriate risk factor, which represents the change in the value of the bank's WESTERn BAnKinG Second, banks do not currently include data on the cash flow characteristics of their assets. However, whether a loan amortizes or not can significantly affect its interest rate risk. In addition, other characteristics, like prepayment options and interest caps on mortgages, also affect the interest rate sensitivity of these assets. To deal with these issues, it was necessary to make several assumptions. Fi rst, I assume that all real estate and personal loans are amortizing, while loans for construction and land development, business loans, and loans to other banks are not. I then calculate the proportion of total loans that are amortizing and nonamortizing, and apply these percentages to each of the four loans-by-maturity categories. For securities, I assume that mortgage-backed securities are amortizing, while all others are not and again Western Banking is a quarterly review of banking developments in the Twelfth Federal Reserve District. It is published in the Weekly Letter on the fourth Friday of January, April, July, and October. FRBSF Net Risk-Weighted Position as a Percent of Total Assets (+200 basis point shock to interest rates) 1.00 apply these percentages to the maturity data. The effects of prepayments and other imbedded options are incorporated in the risk-weights proposed by the Fed. In the absence of additional information, I also assume that banks hold no deep-discount assets. The maturity of deposits is an important issue in determining bank interest rate risk. Deposits with no specific maturity, such as checking and savings accounts, can be thought to have very short maturity since they can be withdrawn on demand. At the same time, however, these deposits are a stable funding source for banks whose rates adjust slowly. Thus, they may have an effective maturity that is quite long. The Fed's proposal gives banks some freedom to allocate their liabilities across the different maturity bands, with guidelines to limit the proportion of deposits in the longer time bands. I follow the proposed guidelines in determining the maturities of bank deposits and other liabilities. For the risk weights, I use the risk factors in the Fed's most recent proposal. The four time bands for which data are currently available do not match up exactly with the seven bands in the Fed proposal. For the medium-term instruments (1 to 5 years), I use the 3-to-5-year proposed risk weight; for my over 5-year maturity band, I use the Fed's 1O-to-20-year risk weight. Finally, the measure I derive does not include data on off-balance sheet activities. Unfortunately, there are no data to characterize bank's off-balance sheet activities or to determine their maturities. While some argue that off-balance sheet positions pose considerable interest rate risk, others suggest that banks use these activities to hedge against interest rate risks in other positions. The net effect of this omission, therefore, is uncertain. Results Using the methodology described above, ! estimate the effect on the commercial banking system of a 200-basis-point across-the-board increase in interest rates. While the effect of interest rate changes would differ if rates rose less or if they fell, this scenario addresses the effect of a large unanticipated positive shock to all interest rates. The interest rate risk measure is the net risk-weighted position, defined as the change in u.s. r---,----r-r---r-T""""""1----r-r---r-T""""""1----r-r---r-r-r---r-+ 1989 1990 1991 1992 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50 1993 bank net worth resulting from the 200-basispoint rise in all interest rates, divided by total bank assets. Thus, a value of 1.0 would indicate that a 200-basis-point increase in rates \vQu!d re~ duce bank net worth by 1 percent of assets. The results of this calculation are presented in the figure for the period from 1988.Q4 to 1993.Q1. According to this measure, the interest rate risk exposure of u.s. banks' on-balance sheet activities is 0.85 percent of assets as of early 1993. Since some interest rate risk is inherent in banking, this exposure does not seem "excessive:' In fact, the Fed has suggested that interest rate risk below 1 percent of assets is within industry norms. The data suggest that interest rate risk among banks as a group has not increased much in recent years. In fact, the figure shows a slight downward trend in interest rate risk since mid-1990. Thus, there is evidence that recent portfolio shifts at banks have not resulted in an increased exposure to interest rate risk. This conclusion comes with two caveats. First, aggregation of individual bank balance sheets may conceal increases in interest rate risk at individual banks. While the figures for the industry as a whole indicate no real systematic shift in interest rate risk among banks, this does not preclude jumps in interest rate exposures at individual institutions. Second, the results presented here omit bank offbalance sheet activities. A better assessment of the risk-enhancing or risk-reducing effects of these activities will have to await the availabil ity of better data from the banking system. u.s. Jonathan A. Neuberger Economist REGIONAL BANK DATA MARCH 31, 1993 (NOT SEASONALLY ADJUSTED, PRELIMINARY DATA) DISTRiCT ALASKA CALIF. ARIZ. HAWAII IDAHO NEVADA OREGON UTAH WASH. FOREIGN (RESIDUAL) DOMESTIC LOANS SECURITIES 28,927 461,520 0 4,643 0 35,692 28,438 297,738 2,393 19,865 0 10,128 0 13,641 0 25,247 64 14,358 32 40,008 TOTAL FOREIGN (RESIDUAL) DOMESTIC REAL ESTATE COMMERCIAL CONSUMER AGRICULTURE INTERNATIONAL 328,652 28,036 300,616 159,749 62,024 53,846 5,308 2,273 5 2,268 1,071 716 19,808 0 19,808 6,978 2,677 6,014 318 8 223,699 26,644 197,054 116,483 39,235 27,481 2,803 77 13,792 1,335 12,458 7,303 3,261 1,076 30 0 6,756 0 6,756 2,129 1,505 2,041 626 0 7,234 0 7,234 2,412 802 3,879 12 0 17,153 0 17,153 7,073 4,465 3,530 397 0 8,440 0 8,440 3,307 1,615 2,779 151 0 29,497 52 29,445 12,992 7,747 6,696 967 0 TOTAL U.S.T.S. SECONDARY MARKET OTHER SEC. 74,301 24,082 38,526 11,693 1,995 875 613 508 8,645 2,738 4,975 934 40,423 11,842 23,193 5,388 5,049 2,817 1,710 622 2,036 463 910 663 3,825 1,676 1,719 429 4,401 1,387 2,158 856 3,636 835 1,817 985 4,290 1,451 1,430 1,409 85 350 4 0 LIABILITIES TOTAL DOMESTIC 448,153 419,220 4,226 4,226 32,305 32,305 297,278 270,835 20,609 18,215 9,376 9,376 12,002 12,002 22,883 22,883 13,109 13,046 36,365 36,333 DEPOSITS TOTAL FOREIGN (RESIDUAL) DOMESTIC DEMAND TIME AND SAVINGS NOW MMDA SAVINGS SMALL TIME LARGE TIME 394,477 26,781 367,696 88,812 278,884 41,200 29,340 0 29,340 5,915 23,425 3,434 7,582 3,407 7,528 1,475 265,750 24,498 241,252 61,820 179,432 24,508 14,794 2,188 12,606 2,352 27,193 39,464 22,291 1,479 1,939 3,126 2,065 1,642 7,787 0 7,787 1,358 6,429 1,017 1,590 991 2,239 592 9,571 0 9,571 2,475 7,096 1,289 2,370 1,572 1,045 819 20,181 0 20,181 3,966 16,216 3,194 4,358 2,206 5,517 935 10,522 64 10,458 2,111 8,346 1,490 44,735 68,030 30,656 3,543 0 3,543 997 2,545 330 538 689 444 507 1,688 2,693 698 32,990 32 32,958 7,818 25,139 4,460 8,021 3,864 7,035 1,697 OTHER BORROWINGS EQUITY CAPITAL LOAN LOSS RESERVE 31,979 42,293 10,204 639 617 40 2,396 3,387 556 14,143 26,897 7,599 5,215 1,649 240 1,427 751 108 1,357 1,639 400 2,136 2,364 450 2,334 1,312 198 2,332 3,675 613 LOAN COMMITTMENTS LOANS SOLD 196,628 15,630 660 25 28,638 153 121,232 14,805 8,297 228 3,279 25 1,941 68 10,231 190 7,135 51 17,214 86 11 ,228 8,495 735 103 84 6 743 585 57 7,309 5,564 492 377 12 179 14 283 16 449 47 257 22 718 70 9,212 2,809 2,330 846 3,227 72 24 24 2 22 662 209 169 48 236 6,130 1,811 1,589 628 2,102 334 154 16 80 162 69 32 5 56 420 72 53 86 209 482 145 144 21 171 251 90 54 12 95 699 235 181 28 256 INCOME BEFORE TAXES TAXES NET INCOME 2,016 780 1,277 31 9 21 81 28 40 1,179 495 765 85 34 86 49 18 26 152 51 98 139 49 80 75 25 46 214 70 135 ROA(%) ROE(%) NET INTEREST MARGIN (%) 1.05 12.08 4.66 1.81 13.82 5.09 0.45 4.74 4.25 0.94 11.37 4.63 1.17 15.94 3.98 1.08 14.07 4.42 2.95 23.90 6.37 1.28 13.55 4.86 1.32 14.03 4.79 1.35 14.69 4.85 LOAN LOSS RESERVE (ALL BANKS) NET CHARGEOFFS, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGRICULTURE 3.10 1.00 0.79 0.41 2.91 -0.02 1.77 0.23 -0.08 0.54 0.57 0.00 2.81 0.74 0.28 0.57 1.83 0.52 3.40 1.19 1.01 0.49 4.08 -0.15 1.74 0.16 0.09 0.13 0.76 0.00 1.61 0.18 0.01 0.07 0.49 0.15 5.52 2.88 0.30 5.29 3.95 -0.09 2.62 0.55 0.38 0.11 1.68 -0.13 0.18 0.15 -0.70 0.77 -0.11 2.08 0.34 0.18 -0.13 1.12 0.12 PAST DUE & NON-ACCRUAL, TOTAL REAL ESTATE CONSTRUCTION COMMERCIAL FARM 1-4 FAMILY REV' 1-4 FAMILY OTHER MULTI-FAMILY COMMERCIAL CONSUMER AGRICULTURE 5.57 7.30 20.65 7.59 8.49 1.13 3.05 8.18 5.46 3.34 5.62 2.90 3.05 3.35 3.02 0.00 6.48 8.32 23.17 8.98 9.19 3.35 1.17 0.74 1.47 1.39 4.50 7.41 8.88 22.67 7.46 0.00 0.50 3.49 27.13 13.31 5.78 4.21 2.43 2.47 5.13 3.35 5.59 0.33 0.98 0.92 2.39 1.69 5.42 1.97 2.65 3.01 3.47 10.85 3.42 9.70 6.12 3.90 5.88 11.82 1.33 11.33 1.51 3.72 1.13 4.04 2.49 26.88 1.93 2.43 9.29 2.43 3.37 2.28 1.17 2.59 2.39 0.00 4.13 6.64 18.85 11.66 20.57 0.59 2.54 10.90 6.39 2.70 8.01 1.31 0.18 2.43 1.04 1.88 5.37 17.72 3.21 2.73 1,18 1.34 2.83 3.86 2.59 4.39 742 245,225 8 2,676 38 19,505 447 159,606 17 8,474 20 4,652 18 6,212 48 16,234 54 7,159 92 20,707 INTEREST FEES & CHARGES EXPENSES TOTAL INTEREST SALARIES LOAN LOSS PROVISION OTHER NUMBER OF BANKS NUMBER OF EMPLOYEES 94,076 1.14 65,902 1.20 10,254 85 3.44 0.51 1,776 0.68 4.13 Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, or of the Board of Governors of the Federal Reserve System. Editorial comments may be addressed to the editor or to the author...• Free copies of Federal Reserve publications can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 974-2246, Fax (415) 974-3341. ~ S~UI ueaqAos 41lM t:t\ ~ ~ Jaded papAOaJ uo pajuud Ollr6 V'J 'O:JS!:JUPJ:l UpS lOLL xog 'O'd O)SI)UOJ:J UOS JO ~U08 aAJaSa~ IOJapa:J DEPOSITORY INSTITUTIONS REQUIRED TO HOlD RESERVES WITH THE FEDERAL RESERVE ON A WEEKLY BASIS PERCENT OF COMBINED MARKET TOTAL FOR MAY 1993. BY REGION DISTRiCT DEPOSIT TYPE CB TOTAL DEPOSITS DEMAND NOW SAVINGS & MMDAS SMAll TIME lARGE TIME 55 39 90 6 ALASKA Sl CU 64 28 60 31 32 66 ARIZONA ---7 4 8 9 3 43 47 10 CALIF CB Sl CU CB Sl CU CB 71 4 92 1 99 0 6 5 25 1 37 41 96 8 17 90 95 0 0 0 1 7 4 11 10 4 2 3 91 0 9 4B 89 57 56 23 37 57 55 75 96 CB = COMMERCIAL BANKS; 89 IDAHO HAWAII Sl CU CB Sl CU 46 6 66 30 90 3 36 66 31 59 34 54 44 37 74 3 52 11 ---CB 5 7 3 7 91 95 92 92 ee 70 23 90 Sl CU CB Sl CU 4 5 4 4 76 21 97 3 78 16 79 16 5 5 0 3 4 11 as 3 0 6 5 43 53 Sl = SAVINGS & lOANS AND SAVING BANKS; CU _ CREDIT UNIONS; 15 OREGON CB 81 95 84 77 77 76 Sl CU 10 9 I 4 8 9 10 13 17 12 12 UTAH CB 79 89 B2 72 61 73 WASH Sl CU 5 5 2 3 11 16 6 16 25 19 CB Sl CU 56 35 83 15 9 2 66 23 11 57 27 17 3S 57 44 54 MAY NOT SUM TO 100% DUETO ROUNDING TYPE OF ACCOUNT OR LOAN DATE SAVINGS ACCOUNTS AND MMDAS MAR 93 APR93 MAY 93 2.73 2.68 2.65 2.87 2.81 2.78 2.54 2.59 2.57 2.59 2.56 2.54 3.03 2.81 2.84 3.33 3.27 3.20 2.71 2.61 2.50 3.09 2.99 2.97 2.98 2.94 2.91 92 TO 182 DAYS CERTIFICATES MAR93 APR93 MAY 93 3.03 2.99 2.98 2.93 2.89 2.87 2.70 2.76 2.74 2.85 2.82 2.80 2.50 2.33 2.25 3.09 3.00 2.98 2.99 2.92 2.96 3.05 3.05 3.04 3.25 3.24 3.13 2-1/2 YEARS AND OVER CERTIFICATES MAR93· APR 93 MAY 93 4.52 4.34 4.33 4.27 3.83 3.95 3.94 3.91 4.16 3.92 3.81 4.19 4.11 5.08 4.90 4.90 5.01 5.01 4.95 4.39 4.39 4.34 4.48 4.56 4.54 4.92 264 6.69 7.37 6.49 N/A N/A N/A 8.07 6.82 N/A N/A 4.97 35 8.41 48 8.71 7 5.61 N/A N/A N/A N/A N/A N/A 8.02 9.21 19.25 8.88 13.65 14.9 8.17 11.84 18.3 COMMERCIAL. SHORT TERM* COMMERCIAL. LONG-TERM' LOANS TO FARMERS' CONSUMER. AUTOMOBILE CONSUMER. PERSONAL CONSUMER, CREDIT CARDS AVE. AVE. AVE. AVE. AVE, AVE. RATE MAT. (DAYS) RATE MAT. (MONTHS) RATE MAT. (MONTHS) AVE, RATE AVE. RATE AVE, RATE DISTRICT NEVADA US 4.47 4.45 4.80 8.32 42 7.52 15 5.20 84 9.41 46 6.72 14 8.17 13.63 17.15 8.23 13.87 17,6 50 SOURCES: SURVEY OF TERMS OF BANK LENDING AND TERMS OF CONSUMER CREDIT; * DATA ARE COMPOUNDED ANNUAL RATES, ARIZ 6.72 N/A N/A N/A CALIF HAWAII N/A 6.63 14 N/A N/A N/A N/A N/A 8.4 15 14.9 7,84 18.19 18.38 N/A N/A N/A 6.56 N/A N/A IDAHO OREGON UTAH MOST COMMON INTEREST RATES ON SELECTED ACCOUNTS. WASH N/A N/A N/A 6.90 N/A
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