Are Banks Playing a Dangerous Game?
NEW YORK -- Flush with cash and facing weak loan demand, banks have plowed tens of billions of dollars into Treasury securities and other government-backed bonds. The move has paid off handsomely as interest rates have tumbled.</br></br>But now some experts are warning that banks have made themselves increasingly vulnerable to interest-rate swings. Some fear that banks are playing the old game of borrowing money at short-term rates and lending it at longer-term rates, a muted version of the dangerous practices of many thrifts in the late 1970s and early 1980s.</br></br>The evidence suggests that banks "are taking additional interest-rate risk," says Paul Horvitz, professor of banking at the University of Houston.</br></br>Bank holdings of government-related securities, including U.S. Treasury securities and mortgage-backed securities, had soared to nearly $600 billion at the end of May from $400 billion in early 1990.</br></br>What's driving the banks' investment strategy is the chance to make a profit on the big difference between short-term and long-term interest rates. Currently, banks can raise money at 3.5% to 4% by selling short-term certificates of deposit, or by borrowing from other banks in the overnight federal funds market.