NEW YORK (TheStreet) -- A sudden, sharp rise in interest rates will drive the next banking crisis, according to CLSA analyst Mike Mayo, who says the issue is an "easy call."
During a panel discussion after receiving the Daniel J. Forrestal III Leadership Award for Professional Ethics and Standards of Investment Practice from the CFA Institute, Mayo dismissed a question about efforts by regulators to improve mortgage underwriting standards.
"That's not the next problem. Let me interrupt. Mortgages are going to be fine," he said. "Number one on my list is going to be interest rate risk at these large institutions. We haven't had a big interest rate shock since 1994. So if I pick one risk in the next five to 10 years I have to come back to this room it's going to be interest rate risk. We should reallocate a lot of examiners from the mortgage area to the interest rate risk area. It's an easy call."
Mayo cited JPMorgan Chase's (JPM - Get Report) more than $6 billion in trading losses on credit derivatives during 2012 -- many of them tied to a former trader named Bruno Iksil who became known as the "London Whale" -- as an early harbinger of the potential problems that may arise from a sharp rise in interest rates.
"I do think it was simply a canary in the coalmine: JPMorgan's whale. The way it came about is unique to JPMorgan but as far as having excess deposits which are invested and having a mismatch -- that's the canary in the coalmine. It's not even a tough call. You know we're going to have an interest rate spike at some point -- we don't know when -- and when that happens, that's when we're going to see damage," Mayo said.
Another problem area Mayo foresees is commercial lending.
"Some of your traditional banks... are making overly aggressive commercial loans right now," he says, adding the problem is something "we're hearing from all the banks."
-- Written by Dan Freed in New York.