Hidden Elements of Rate Risk Vex Hedge Strategists.

If it's not one thing, it's another. That's the problem with hedging.

Just ask Andrew Hickman of ERisk, baed in New York. Mr. Hickman spoke at a U.S. Bancorp Piper Jaffray investor conference in New York, where he advised that lenders face hidden interest rate risk that can be as important as the rate risk that is disclosed.

For instance, banks benefit from rising home loan volume in a falling interest rate environment. But they also face a likely increase in bad loans, since a weak economy is typically what spurs the Federal Reserve Board to lower interest rates.

"Charge-offs are actually quite sensitive to interest rate risk," Mr. Hickman said during the conference.

On the bright side, low rates in the most recent economic cycle have helped to boost commercial real estate values and keep real estate credit problems at bay, he said. With the lowest interest rates in nearly half a century, property owners were able to restructure their debt burdens in the face of rising vacancy rates.

"This past cycle, we've kind of dodged the bullet on property values," Mr. Hickman said.

But that begs the question, if rates rise, how much might property values fall? And if loan-to-value ratios rise, will that lead to higher charge-offs ...