Toughing Out the Rate Spike

Bank of America(BAC Quote), for instance, began selling some of its more interest-rate sensitive mortgage-backed securities in early July. Long Island, N.Y.-based North Fork Bank(NFB Quote), where mortgage-backed securities had accounted for 82% of its investment portfolio, began doing it even earlier. The day before the Fed's last interest rate cut in June, North Fork said it was beginning to reposition its investment portfolio for a rising rate environment.

An earlier study by Standard & Poor's estimated that regional lenders such as New Jersey's Commerce Bank(CBH Quote), which invested heavily in low-yielding mortgage-backed securities, could be hardest hit by the rise in rates. Commerce is second only to Roslyn Savings Bank(RSLN Quote), a small New York thrift, in its exposure to mortgage-backed securities. Another bank owning a large proportion of mortgage-backed securities is Provident Bank(PBKS Quote).

The sudden closing earlier this month of Capitol Commerce, one of the West Coast's biggest privately owned mortgage bankers, also sowed jitters. Most on Wall Street believe Capitol Commerce's problems were due for a failure to anticipate a rise in rates and hedge its loan portfolio.

Of course, the nation's banks will get another chance to address the impact of soaring interest rates when they report third-quarter earnings in mid-October.