(TheStreet)...The U.S. national debt of over $15 trillion is a topic frequently avoided by people looking to manage stress, but the debt represents a dire threat to smaller banks over the next several years.
Despite a debt roughly matching the annual gross domestic product -- similar to Greece's debt load -- the Federal Reserve has had a relatively easy time keeping short-term interest rates near zero, and the market rate for 10-year U.S. Treasury paper was just 1.92%, as of Wednesday morning, falling from roughly 3.50% two years earlier, and 4.55% at the end of February 2007.
So the "deficit without tears" -- in the words of French economist Jacques Rueff -- goes on, as the rest of the world continues to use the U.S. dollar as a reserve currency and international investors continue to put their excess liquidity into U.S. Treasuries.
So what does the obscene national debt mean to U.S. banks in the current environment, and what does it mean going forward, when rates eventually rise, as the economy continues to strengthen?
Mayer says that "interest rate risk stress testing is very important going forward," and that banks and thrifts may need to stress tests for scenarios of rate hikes of as much as 400 basis points in a year.
Federal bank regulators are worried over the effect of the U.S. federal deficit and debt on the banks and thrifts they supervise, and are "trying to get the word out, that if institutions are not properly managing IRR or stress testing, they can be required to augment their capital."
