Tag: Interest Rate Risk Management

How To Calculate The Interest Sensitivity Of People, Products, Branches And Technology

Combining Rates and Strategy

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.

Solving The Conundrum of Bank Loan Hedging

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.

Loan Hedging With A Flat Yield Curve – Part II

Using Swaps for Loans

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.

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.

What Community Bank Borrowers Say About Loan Hedging

Borrowers on Loan Hedging

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. 

 

Complexity

 

Deposit Strategy: New Products & Pricing (Part II)

Deposit Strategy with Rising Rates

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.

How Banks Can Use Rates To Their Advantage (And The Prospect Of Negative Rates)

Handling the current rate environment

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.

Why Your Bank Should Use Libor Instead of Prime

Using Libor For Your Bank and Not Prime

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.

What Bankers Need to Know About Interest Rate Forecasts

Interest Rate Forecasts For Bankers

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.

What is the Fed’s Next Move?

The Future of Interest Rates

It’s hard to meet a banker today who doesn’t want to banter about the Federal Reserve’s next monetary step.  Despite the talk of an imminent Fed hike for the last two years, it now seems right around the corner – or does it?

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