Interest rate risk

By the end of 2000, the US economy was well into its record 10th year of expansion. The strong economy meant strong local demand. As economic prosperity rose, so did loan-to-deposit ratios. However, growth deposits did not keep pace. The single biggest concern of those surveyed for Grant Thornton's 8th Annual Survey of Independent Bank Executives continues to be deposit growth. The funding shortage ties directly to customers' shifts toward nonbank financial service firms. Strong loan demand and lack of deposit growth creates a big liquidity problem and limits a bank's ability to manage interest rate risk. As more loans get booked, flexibility could vanish. As the economy slows, credit risk may become a problem. One of the culprits that put banks in this situation may be the savior that gets them out - the yield curve. Banks should make interest rate risk a high priority.