Recently we had a meeting that few banks have. It was a rarity for us, but it was eye-opening for all that attended. It brought an important clarity about the future, a clarity that would be helpful for any bank to achieve, no matter what their size. This meeting was an asset-liability committee meeting (ALCO) of sorts, but it was also strategic.
Tag: Interest Rate Risk Management
Rising rates, regulatory pressure on interest rate risk, competition and the best way to hedge long-term, fixed rate loans is causing a puzzle for many banks. Luckily, we love solving puzzles and take an interest in new and challenging conundrums especially related to banking. A client recently asked us to solve an oldie but a goodie: what is it that a man can do standing up, a women sitting down, and a dog on three legs? The answer is, shake hands.
In one of our blogs last week we discussed why a flattening yield curve has real consequences for the performance of a community bank’s loan portfolio. The market expects a continued flattening of the yield curve through 2018 and community banks must develop loan products that perform well in such an interest rate environment. In today’s blog, we review the pressures that community banks will face in this competitive commercial loan environment and how banks can position their commercial loan offering to outperform their competition.
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.
In a number of previous articles, we discussed important factors that community bankers should consider in analyzing hedging programs. We also listed the pros and cons of various hedge alternatives, and finally, we gave examples of some specific application of loan hedges currently used by community banks. In this post, we conclude our hedge series by highlighting borrowers’ common objections to using hedges and how community bankers that we work with deal with and overcome these objections.
In Part I (HERE), we got all Warren Buffet against the backdrop of Jimmy Buffet and explored how rising rates were starting to impact deposit balances. We questioned whether “surge balances” are in fact a thing and if they are, is this the time that we will see an exodus of balances move into other asset classes like fixed income, equities, real estate and capital spending.
It is normal for stock markets to fluctuate, interest rates to vacillate, oil priced to decline and China’s economic growth forecasts to be adjusted (those numbers are mostly made up anyway). However, the recent behavior in the above mentioned markets is much more volatile than anything experienced over the last few years, and this turmoil is going to change lending and borrowing behavior. Loan terms, floors, rate resets and debt levels have already been chanced.
Every community banker is familiar with the Prime rate, and most community banks do not have many loans or deposits tied to LIBOR. The question comes up – should you have more LIBOR loans? The answer is a clear yes and while LIBOR is slightly harder to explain to some borrowers, there are 6 good reasons to switch from Prime to LIBOR.
Bankers are bombarded with views, opinions and predictions. Now that the FOMC raised interest rates by 25 basis points and has embarked on a tightening cycle, most economists, pundits and correspondent salespeople are trying to convince community bankers of their specific rate view. But bankers should be circumspect of others’ rate views and should not buy into one rate path but instead consider various possible interest rate paths. Bankers should be mindful of the dispersion around that mean.