Fed Pushing Banks Back Into Risky Business: Moody's
Currently, the 10-year U.S. Treasury yields roughly 1.83%, up slightly from one-year lows of 1.38%. Ten-year government bond yields in Canada, the United Kingdom and Germany are all below 2%, and in Japan, yields stand at just 0.72%, up barely from 12-month lows of 0.684%.
When it comes to securities portfolios, Moody's notes that banks buying up higher risk and longer maturity assets may not fully see the risks of such investments until interest rates begin to rise.
Williams, the Moody's Vice President, says a scenario of falling net interest margins and rising credit costs on loan portfolios would indicate the negative impact of current Fed policies. "This is only going to begin to surface in coming years," he adds.
Still, in its 2013 outlook for the global banking system, Moody's says this year may prove to be less of a challenge than 2012, when the agency downgraded the ratings of most of the largest banks in the world including JPMorgan(JPM) , Bank of America (BAC) , Citigroup(C) , Goldman Sachs (GS) and Morgan Stanley (MS) .
Other risks aside from macroeconomic issues and low interest rates include fragile investor confidence on the financial sector, and new regulations that may cause banks to raise further capital and liquidity.
Notably, Moody's 2012 bank ratings downgrades hinged on the assumption that the U.S. government will be reluctant to bail out large financial institutions, were a new crisis to emerge. As regulators continue to hammer out laws to resolve troubled banks, the agency still sees the prospect of ratings pressure.
On the positive side, Moody's says revamped liquidity and a focus on increasing regulatory capital through the crisis puts U.S. banks in a far more stable position in the wake of the crisis.
For more on banks and the Federal Reserve, see how the central bank prepared to buy bank stocks in 2007 .
For more on Moody's bank ratings actions last year, see the agency's June 2012 ratings bloodbath .
-- Written by Antoine Gara in New York