Bank Regulation

With Nod To Rate Hikes, Fed’s Dudley Cautions Small Banks On Risk

Watch out for falling … oh, wait, rising interest rates.

Federal Reserve Bank of New York President William Dudley said on Wednesday (April 18) that smaller banks, notably community banks, may see rising risk in the face of rising rates.

Dudley, reported Reuters, stated that these banks had boosted their investments in ways that would expose them to the vagaries of higher rates. He recommended that the banks should re-evaluate their portfolios.

Prepared remarks tied to a banking conference in New York show that Dudley said that “we have observed that some community banks have taken on more interest-rate risk by increasing the maturity of their assets and the average duration of their loan portfolios. It will be important for community banks that are very sensitive to interest rate risk to evaluate the risk management of their loan portfolios.”

In separate coverage, Reuters reported that Dudley also said the Federal Reserve will boost interest rates to what would mark a “slightly restrictive” level. That intention to increase interest rates comes amid a strong economy, marked by low unemployment and inflation.

According to estimates, the rate would be 3.4 percent by 2020, about 50 basis points higher than a level considered “neutral.” Rate hikes would be gradual, and the Fed itself is looking to hike rates two or three more times by the end of 2018.

“A gradual path of interest rate increases remains appropriate,” Dudley said. “Even though the unemployment rate is low, inflation remains below our 2 percent objective. As long as that is true, the case for tightening policy more aggressively does not seem compelling.”

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