Analysis: Small and mid-sized banks face interest-rate strugglesSubmitted by meekandmild on Wed, 03/20/2013 - 09:16
BOSTON (Reuters) - Some banks have been buying longer-term bonds to boost profits in a low-interest rate environment, sparking fears their profits will be squeezed when the Federal Reserve eventually starts to hike rates.
Banks are drawn to bonds maturing years in the future because the securities pay more interest than shorter-term debt. But rising rates will give banks higher funding costs, without necessarily giving the same lift to the income from all their assets, squeezing profits.
The lenders that could get hit hardest by higher rates are smaller community banks and mid-size regional lenders, analysts say. These banks generally have low income from fees and no real earnings from investment banking, relying mostly on income from lending and their growing bond portfolios.