Specter of Interest Rate Risk Haunts Regulators, Banks


As speculation swirls about when the Federal Open Market Committee will raise prevailing interest rates, policymakers are beginning to worry about the impact on financial institutions, many of which could face new risks as a result. The FOMC on Oct. 28 decided to keep the target federal funds rate between zero and 0.25% — the “zero bound” rate that the committee has had in place since December 2008. One factor that is uncertain is what will happen to deposits when rates go up. Karen Shaw Petrou, managing partner at Federal Financial Analytics, said that banks have traditionally been insulated from fluctuations in the federal funds rate because people are less likely to move all their money around chasing after a modestly higher return. But that “sticky” nature of deposits may have eroded since the Fed last raised its rates, she said, because there are so many more places to put one’s money, especially if firms don’t have to work as hard to achieve more attractive returns. “Historically, deposits have been sticky because they have no place — other than mutual funds and money market funds — to go,” Petrou said. “We know that is not going to be the case now, though there is a lot of debate about what is going to be the case.”