The Fed may have nudged interest rates upward for the first time in nearly a decade, but bankers are settling in for a very long, slow journey back to normal. Moreover, some say the protracted low-interest rate environment still to come could undermine financial stability in the United States.

Specifically, the U.S. Treasury’s Office of Financial Research, in its latest report to Congress, mentioned the prolonged low-rate environment as one of the elements contributing to the U.S. financial system’s vulnerability to shocks. Persistently low rates will drive investors to take greater risks and could encourage excessive borrowing.

The Fed’s action last December did not alter that assessment, the report said.

Though we’ve been in a low rate environment for a long time, at first bankers didn’t really anticipate just how long that would be, said Robert Ashbaugh, a senior risk management consultant at Sageworks.

Ashbaugh said he’s seen banks start to seriously face up to the rate environment in the past few years, sometimes focusing on fee-based businesses or getting into more out-of-market lending.

“Banks [are] handling it in different ways. If you roll back the clock and look at this low rate environment, community banks’ balance sheets are really not built for a long-term, low interest rate environment,” said Patrick Ward, a managing director at Darling Consulting Group in Newburyport. “There’s an implicit floor on the cost of funds and as asset yields continue to come down, it continues to put earnings pressure on them.”

Ward said he’s seen some banks respond by changing the credit structure of some of their investments, swapping out U.S. Treasury, Agency, Fannie Mae and Freddie Mac securities for corporate or municipal bonds, or taking on longer-duration investments than they used to.

Meanwhile, Giuseppe “Joe” Femia, the director of G.T. Reilly & Co.’s financial institution advisory and assurance services, said that he’s recently noticed that more banks are holding low rate mortgage loans on their books, so they can at least reap some benefits of interest income in this low-rate environment. With recent movement on the Fed’s part, Femia said he expects to see more banks may begin selling those loans again.

Risk Vs. Reward

But if there’s one area of banking where everybody seems to pretty much agree competition is heating up, it’s commercial lending.

Femia said that most of his financial institution clients don’t take too much risk with investments, but he has seen more and more community banks getting into commercial lending.

“It might be that my clients feel like they can better control the risk on lending, whereas investments are more market-driven,” he said. “[Lending is] perceived to be more of a controlled risk.”

And as more and more players crowd the commercial lending field, competition for those loans has gotten pretty stiff.

“We’re seeing longer fixed rate terms, higher loan-to-value ratios, lower or zero fees, waiving closing costs … With the best commercial real estate deals, some of our clients say it’s not unlikely to see five, six, seven or even more banks bidding on it in this environment,” he said.

That, in turn, is pushing more banks to enter into interest rate swaps, since borrowers naturally want to lock in those low, fixed rates. Brookline Bancorp, for instance, has waded into those waters and in its most recent quarterly earnings, the company saw a bump in noninterest income due to that particular revenue stream. Company leadership said in a conference call that it allowed them keep more of their existing commercial customers in-house.

Femia said he’s also seen some banks enter into interest rate swaps on their Federal Home Loan Bank borrowings. He believes that can be a bit riskier.

“If the rates stay low for a long period of time, that could financially hurt the bank,” he said. “I have a a few banking clients who did this a couple of years ago and they’re losing money on those swaps because the rates have remained low. However, it does provide some good protection to the bank if the rates do start rising.”

Community financial institutions, particularly those in Massachusetts, are notoriously cautious when it comes to taking risks, but all the same are anxious to see the rate environment normalize.

“The question we always get is, when is low pricing finally going to settle down? Unless we have some sort of credit event, it’s hard to see where the end-game is,” Ward said. “My expectation is that rates are going to move up a lot slower than what we’ve heard from the Fed officials, and we may find that 2016 may be even a more difficult rate environment than ’15 as the yield curve continues to flatten.”