Banks are making what could turn out to be an expensive bet that interest rates will stay low for several more years.
The level of loans and securities with a duration of longer than three years is at 35.4 percent of total assets, according to data the FDIC released this week. That's near the highs reached late in 2016 and indicative to regulators that banks are taking risks that could backfire.
Those particular assets mostly have fixed rates. If interest rates rise over the next few years and banks have to pay more for deposits, that would crimp operating margins and cut into profits. While many industry watchers have touted the benefits of higher rates for banks, there's also a risky flip side.
"The interest-rate environment and competitive lending conditions continue to pose challenges for many institutions," FDIC Chairman Martin J. Gruenberg said in a statement. "Some banks have responded to this environment by reaching for yield through higher-risk and longer-term assets."
Banks are coming off another strongly profitable quarter, earning $48.3 billion in net profits in Q2 and posting a 1.14 percent return on assets that was the best since the second quarter of 2007, just before the worst days of the financial crisis.
However, the post-crisis days have posed a unique challenge for the $16.4 trillion industry. The Federal Reserve has kept benchmark rates anchored at historically low levels, sending institutions scrambling for ways to generate yield.