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September 11, 2013

INSIGHT-U.S. banks surrender future profit for capital relief now

U.S. banks are increasingly giving up the right to sell tens of billions of securities in their investment portfolios, a shift that helps them avoid the pain of weaker bond markets but will cut into future profits as interest rates rise.

Lenders ranging from large banks like U.S. Bancorp to smaller banks likeCullen/Frost Bankers Inc have been changing the way they account for investment securities, adopting a treatment that essentially forces them to hold onto bonds through thick and thin, instead of being able to sell them when markets tank. The accounting switch gives them near-term relief that helps them meet new international capital and liquidity rules.

But analysts fear that as bond markets keep weakening, banks will be stuck with more turkeys in their portfolios, giving them less cash to invest or lend at higher rates.

The willingness of lenders to surrender future profits shows the pressures they face in an era of restrictive regulations, soft loan demand and historically low rates that are now poised to rise. The exposure of banks to rising interest rates threatens to undo much of the progress that lenders had made in building capital since the financial crisis, said David Hendler, an analyst at New York research firm CreditSights.”


Read full Bloomberg article here

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