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- Study Finds 75 Percent of U.S. Banks Didn’t Hedge Interest Rate Risk; Unrealized Losses On Securities $516 Billion at End of First Quarter
Study Finds 75 Percent of U.S. Banks Didn’t Hedge Interest Rate Risk; Unrealized Losses On Securities $516 Billion at End of First Quarter
by Pam Martens and Russ Martens Wall Street on Parade
A group of academics have conducted a study that found that during the fastest pace of Fed interest rate hikes in 40 years, the majority of U.S. banks failed to hedge their interest rate risk. The report’s findings include the following:
“Over three quarters of all reporting banks report no material use of interest rate swaps.”
“Only 6% of aggregate assets in the U.S. banking system are hedged by interest rate swaps.”
“Banks with the most fragile funding – i.e., those with highest uninsured leverage — sold or reduced their hedges during the monetary tightening. This allowed them to record accounting profits but exposed them to further rate increases. These actions are reminiscent of classic gambling for resurrection: if interest rates had decreased, equity would have reaped the profits, but if rates increased, then debtors and the FDIC would absorb the losses.”
The use of the phrase “classic gambling” to describe 75 percent of the U.S. banking system by highly credentialed academics might be something that the U.S. Senate Banking Committee might want to hold a hearing about with some sense of urgency.