Banks and businesses are watching the interest rates

With the start of 2015, the subject of interest rates has become a lot like the weather: Everybody is talking about — or at least thinking about — it.

Unlike weather, however, which nobody does anything about, some people are trying to plan in advance for an interest rate increase.

Eric Seifert doesn’t know if rates will finally rise significantly in 2015 or not. He spent 32 years in banking and is now a growth specialist at the Michigan Small Business Development Center at Grand Valley State University, where he helps entrepreneurs and small companies get financing.

Interest rates are at an all-time low, said Seifert, “and they can’t stay this low forever.”

He noted over the last 30 years a good average rate on commercial loans was typically around 9 percent, but in the last few years rates have ranged from 3 percent to 6 percent, which he termed “unusually low.”

“We’ve just been spoiled by these low rates — sensationally low, but there is no way on earth they are going to stay that way forever,” he said.

The Washington Post reported recently that, due to increasing momentum in the U.S. economy, many expect the Federal Reserve to finally raise short-term rates in 2015.

Rob Bondy, an audit partner at Plante Moran in Grand Rapids, noted the Fed has now expressed some concern about inflation, which it tries to forestall with higher interest rates, and so, he said, “Maybe this is going to be a lot more of a sooner-than-later event.”

Bondy added there are indications that “by now, folks expected this to have happened.”

As for a significant rise in the interest rate, Bondy said bankers “are anticipating this and are looking forward to it — very much in a hopeful way.”

Many banks, he said, have been offering variable rate commercial loans, which of course would be to the bank’s advantage if rates suddenly do start moving up.

“We have seen more of our commercial clients in the larger size enter into interest rate swap agreements,” in which the bank still has its variable rate but the borrower swaps out part of the risk with a “counter” party in a contract that effectively fixes the interest rate the borrower pays.

He said Plante Moran is also seeing companies manage the risk by trying to renegotiate for a longer-term fixed rate on their current loans.

Even though banks stand to gain by a significant increase in interest rates, Bondy said a lot of bankers are proactively trying to help their customers be prepared for a significant increase.

Seifert said banks have been doing “sensitivity analysis” of their variable rate commercial loans to determine if the borrower’s business will still be able to afford a higher interest rate.

The last thing banks need now is a new wave of defaults on loans, which spelled the demise of many during the last recession, he said.

Joel Rahn, president of Chemical Bank’s West Region, which is based in Byron Center, said Chemical Bank’s loan officers have been “proactively discussing the possibility of rising rates over the past 12 to 18 months, encouraging our commercial customers to protect themselves with long-term fixed rates as a hedge against rising interest rates.”

Rahn added, “The vast majority of the commercial real estate and (commercial and industrial) expansion projects we’ve funded in the past year have been on fixed rates, as our customers are very aware of the strong likelihood of a rising rate environment.”

The residential side will be affected by rising rates, as well, he said.

“As with most banks, we’ve worked with the majority of our residential mortgage customers to refinance their mortgage debt to take advantage of historically low rates,” he said.

Glenn Pettengill, professor of finance at the GVSU Seidman College of Business, said, “Generally, there is going to be a negative impact” from a sudden shift to significantly higher interest rates.

The cost of borrowing money for a business is really just another cost of doing business, so any increase isn’t good for any borrower, he said.

A major impact will be on the bond market, with bond holders owning bonds that drop in resale value. New bonds, under rising interest rates, will be of shorter duration, too.

Pettengill said when interest rates are very low, the borrower generally wants as long a term as possible. In fact, when bond rates were very low a few years ago, some major U.S. corporations, including Disney and Caterpillar, issued 100-year bonds.

“Somebody suggested you had to have a lot of faith in Mickey Mouse to buy a hundred-year bond,” quipped Pettengill.

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