BANK´S BALANCING ACT / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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NOVEMBER 22, 2009, 11:58 A.M. ET.

Banks' Balancing Act

By PETER EAVIS

Despite all the efforts to make banks safer, one side of their balance sheets actually has gotten more dangerous.

Financial firms always need to avoid becoming overreliant on shorter-term borrowings to fund loans. Such dependence can cause havoc when interest rates rise sharply or credit markets freeze up.

Yet Moody's Investors Service research shows that the average maturity of U.S. banks' wholesale debt has fallen to 3.8 years, from 5.8 years in 2006 and 7.8 years in 2002. These banks face $2 trillion of wholesale debt maturities through 2015, but about three-quarters of this amount comes due by the end of 2012.

Regulators have stress-tested assets, but little has been done to reduce risks in bank liabilities, says Mike Mayo of Calyon Securities.

One reason debt maturities have shortened is that banks took advantage of the credit bubble to sell more short-term debt. But regulators themselves have contributed, by setting up the Temporary Liquidity Guarantee Program. Launched in the crisis to alleviate funding pressures, this program allowed banks to sell about $600 billion of ultracheap government-backed debt that matures by 2012.

Of course, interest rates likely are to stay low for a long time, making it easier for banks to refinance. But even in a stable interest-rate environment there could be pain. Regulators likely are to pressure banks into lengthening debt maturities. Mr. Mayo estimates that increasing use of more-expensive, long-term borrowings could reduce future bank earnings by at least 15%.

A nastier scenario would be one where interest rates rise quickly. As well as driving up the cost of short-term debt, it would make it harder to sell longer-term bonds. And a rise in rates could simultaneously whack bank-loan portfolios. Many loans are only current right now because borrowers have floating interest rates that cost little.

All the cheap money thrown around in the crisis could yet get costly.

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