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September 30, 2005

Is a Flattening Yield Curve Massacring Bank CFOs?

The WSJ connects the dots on the recent departure of BofA and FifthThird Bank CFOs, saying that both were pushed out because they failed to anticipate and respond to a flattening yield curve and the ensuing loss of net interest income.

Like all financial-firm executives, finance chiefs of the country's regional banks are grappling with a rise in short-term rates even as long-term rates fall. This convergence of rates -- a bugbear that bankers call a flattening yield curve -- cuts profit margins by raising the banks' borrowing costs while lowering the rates they charge on loans to customers.

Perhaps it was not so much the positioning failure as the failure to accurately warn investors that did them in:

Analysts believe the disconnect between the executives' public remarks and the bottom lines was the real cause of their departure. Some say more departures are possible.
"Bank CFOs are now being pilloried because of their inability to correctly gauge this shift in the financial markets," said Richard X. Bove, an analyst with Punk Ziegel & Co. Messrs. Graf and Oken "did not provide the appropriate signal to shareholders."

Asian bankers are of course unable to take as much structural rate risk due to the lack of long-term yield curves in most local currencies, but we have still seen some earnings disappointments on the NIM and NII fronts this past reporting period.

Posted by The Banker at September 30, 2005 05:10 PM

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