4 Great Ways to Prepare for Rising Interest Rates

March, 2015

Houston, we have a problem. When the prudential regulators jointly issued their warning for banks to prepare for rising interest rates over four years ago, the banking community took notice. As bad as the economy was in 2010, a fledgling recovery was already under way, and growing confidence and consumer optimism were thought likely to translate into a steeper yield curve and higher interest rates. Many banks had all the motivation they needed to reposition to take advantage of this expected economic strengthening. Instead, a debilitating sovereign debt crisis in Europe followed, with slowing growth in Asia, and a glacial-paced jobs recovery in the U.S. that pushed back hard on the recovery narrative. The relative “safe haven” of US Treasuries created excess demand for government debt, and repeated FOMC decisions to continue QE would seal the deal, resulting in lower rates for longer than most anyone had expected. Thus, the regulators had prepared banks for a rise in rates that never happened – a failure to launch.

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