The banking industry's increased exposure to mortgage-backed securities was a contributing factor to the recent liquidity disruptions in financial markets, according to a special report by A.M. Best Co., Oldwick, N.J.Volatile interest rates and greater MBS exposure may lead to lower asset valuations for banks, A.M. Best said. "Anticipation of this has contributed to recent liquidity disruptions in the financial markets, which have forced the Federal Reserve to reassert its status as lender of last resort to assure stability in the U.S. banking system," the company said. The report cites various factors contributing to the disruptions, including greater exposure to MBS stemming from "an effort to enhance yield, which has also added risk to their balance sheets." Among the other factors is the fact that the banking industry has "taken advantage of additional funding options" in recent years, "relying less on the securities portfolio for liquidity, which has led to a steady decline in highly liquid Treasury holdings," according to A.M. Best. The company can be found online at http://www.ambest.com.

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