Tag: Swap

Using the Right Tool For Fixed Rate Loans

Better Lending Tools

Everyone agrees that using the correct tool for the job is an important rule for successfully completing a project.  Using a sledgehammer on tacks will leave dents, and applying a screwdriver to move boulders will likewise be equally counterproductive.  The same rule applies in banking, and most community bankers are well aware of this.  Community bankers appreciate that their project is very different than the projects at national and regional banks.  Community banks have different business models and different customers compared to the nation

Choosing The Right Loan Index For Your Bank

Better Loan Pricing

Community bankers are currently paying close attention to commercial loan pricing given near-record tight credit spreads and increasing interest rate risk.  The vast majority of commercial loans in the market are priced to an index plus a credit spread.  Determining the appropriate credit spread that will win the business and provide sufficient return to the lender is a key element of RAROC (risk adjusted return on capital) analysis.  However, the underlying index to

What Hedging Is Doing To Banks

The Impact of Swap and Hedging Strategies

When banks decide to adopt a loan hedging product the initial management strategy is to reserve it as a defensive tool only. Typically bankers decide to adopt a swap program because borrowers demand longer fixed rates, competition is willing to accommodate such structures (often with a swapped solution) and extending loan duration in a rising interest rate cycle does not make sense for prudent ALM purposes.

Loan Hedging Considerations for Community Banks

Hedging Loan Interest Rate Risk

In a previous blog, we described what factors community bank managers might want to consider in analyzing a loan hedging program for their specific needs.  In that blog, we listed the pros and cons of using a hedge to control risk and increase profitability.  We then wrote a follow-on article that analyzed the various instruments and strategies common in the bank hedging market to include swaps and other interest rate derivative instruments.  We provided an in-depth

Managing Interest Rate Risk In Loans

Interest Rate Risk Management at Banks

The Federal Reserve held off in raising rates at its November meeting, preferring to assess the results of the presidential election and allow time to make further progress on their twin goals of full employment and price stability.  Since that November meeting, the results of the presidential elections have convinced markets of future expected inflationary pressures resulting from fiscal stimulus in the form of tax cuts and increased government spending.  Furthermor

Is It Time For Your Bank To Hedge?

Loan Hedging and Bank use of Swaps

Historically community banks have been hesitant to use derivatives, mostly interest rate swaps, to manage credit, interest rate, and sales risk. Derivatives have been historically stigmatized and even more so after the last recession.  Interest rate hedges have predominantly been used by larger and more sophisticated banks. However, approximately 15% of all commercial banks now report some form of a derivative on their balance sheet, and 9% report interest rate swap exposure.

Six Not So Obvious Reasons Why More Community Bank Are Hedging

Bank Loan Hedging And Using Swaps

Until approximately ten years ago, interest rate loan hedging (using swaps) was prevalent for national and larger regional banks, but most community banks avoided loan hedging for various reasons.  In the last ten years, more community banks have started to offer their borrowers some form of loan hedging option.


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