Here’s a chart I like to pull out from time-to-time when I make presentations on interest rate risk or stress-testing. I realize there is a whole generation of professionals in the banking world out there who probably don’t remember interest rates in 1980, but I’m certainly old enough to.
It was the year that my brother really wanted to buy his own car. However my brother, being a very typical American teenager, was suffering from his own personal liquidity crunch. I remember my Dad saying he would lend my brother the money at a simple rate of Prime minus 1.00%. What kind of a deal do you think that was? Take a look at the chart.
No doubt the Prime rate jumped around quite a bit over the year, but look at the change from November to December. In November 1980 average Prime rate was 16.06%. The following month Prime averaged 20.35%, a change of +429bp in just one month!
Now, when most people look back on 1980 they say that things were much different back then. Indeed that’s the exact type of feedback I got when I spoke on Interest Rate Risk to bankers and regulators between 2001 and 2008. Almost everyone thought that 1980 was an extreme and that we weren’t ever likely to see that repeated again. I would love to talk to those same groups now; even better, I wish I would have recorded the feedback and subsequent discussions. They would probably be very entertaining.
What do you think now? I know there’s at least six members of the Fed Reserve Board that think there is a possibility of a rate shift up by +350bp to +425bp sometime in 2015 or 2016.
Maybe things will be different then…