Posted By thestatedtruth.com on January 7, 2010

Jan. 7 (Bloomberg) — U.S. regulators including the Federal Reserve warned banks to guard against possible losses from an end to low interest rates and reduce exposure or raise capital if needed.

“In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates, the Federal Financial Institutions Examination Council, made up of agencies including the Fed and the Federal Deposit Insurance Corp., said in a statement today.

Several U.S. central bankers have called for raising interest rates at a faster pace than increases in the past, while the Fed hasn’t said when or how quickly it plans to lift borrowing costs from a record low.

The regulators told banks to run stress tests with scenarios including instantaneous and significant changes in rates and substantial changes in rates over time, including shifts of as much as 4 percentage points.

“Institutions should ensure their scenarios are severe but plausible in light of the existing level of rates and the interest-rate cycle, the advisory said.

Financial stocks lost ground after the release. The Standard Poor’s Supercomposite Financials Index was up 2.2 percent at 224.5 at 3:24 p.m. after rising as much as 2.5 percent.

Fed Governor Kevin Warsh said in September that rates may need to rise with greater swiftness than is modern central bank custom. Philadelphia Fed President Charles Plosser said the same month that officials need to be prepared for the possibility they will have to raise interest rates in steps of 0.50 or 0.75 percentage point, as policy makers did when they cut rates.

More at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayR_RKqdq93c

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