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Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank

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FDIC Outlook

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In Focus This Quarter:
Interest Rate Risk and Funds Management

Starting in mid-year 2004, the Federal Reserve began raising the target federal funds rate from historical lows. As a result, the shape of the yield curve flattened substantially during the second half of 2004. These changes in the interest rate environment have prompted some industry observers to express concerns about interest rate risk at FDIC-insured institutions. This issue of FDIC Outlook assesses the extent of interest rate risk and emerging issues in liquidity and funds management of FDIC-insured institutions.

FDIC Chief Economist Richard A. Brown (far right) leads the discussion at the Inerest Rate Risk Roundtable. Panelists are (l to r): William A. Stark, FDIC; Tanya S. Azarchs, Standard & Poor's; and Hal S. Johnson, BB&T.

Perspectives on Interest Rate Risk Management in the U.S. Banking Industry
The FDIC hosted a roundtable discussion with industry experts on January 13, 2005, to identify major issues in interest rate risk management for FDIC-insured financial institutions. FDIC Chief Economist Richard A. Brown moderated the roundtable, which consisted of Tanya S. Azarchs, Managing Director of Financial Services Ratings at Standard & Poor's; Hal S. Johnson, Executive Vice President of Funds Management at BB&T; and William A. Stark, Associate Director of Capital Markets in the FDIC Division of Supervision and Consumer Protection.

Profiles of Depositories Exposed to Interest Rate Risk
Recent increases in short-term interest rates have some market participants concerned about how bank and thrift earnings would respond to an increase in longer-term assets at many institutions. A related concern is the indirect effect of interest rate increases on borrowers' credit quality. This article describes some general profiles of depositories that may be vulnerable to rising interest rates and why rising interest rates appear to pose less of a concern today than during the 1970s and early 1980s.

Rate/Volume Analysis: An Off-Site Approach to Measuring Interest Rate Risk
A rising interest rate environment can have varying effects on an institution's earnings, depending on its asset/liability structure. Assessing the amount of interest rate risk prevalent using off-site data is challenging. An alternative method of assessing interest rate risk for a particular period is through rate/volume analysis. The article uses this technique to assess how rate-sensitive earnings were at community banks during the past 12-month period.

Funding Asset Growth in a Rising Rate Environment: National and Regional Perspectives
During the past decade, greater competition for traditional deposits among industry participants, credit unions, and other financial intermediaries has led to funding challenges for many FDIC-insured institutions. This article analyzes liquidity and funding issues from both a national and regional perspective.

Last Updated 03/17/2005

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