ABA Banking Journal asked Matthew Tevis and Todd Cuppia to explain why community banks are returning to wholesale funding
Summary
ABA Banking Journal reports community banks will return to wholesale funding as deposits return to normal levels after historic highs during the pandemic. Matthew Tevis and Todd Cuppia explain how these banks are hedging those moves to limit volatility in their liabilities.
ABA Banking Journal“We probably went two years when we didn’t see any funding hedges, and now in some cases it’s multiple times a day,” Cuppia says.
More banks are turning again to wholesale funding and hedging to limit volatility in their liabilities. As deposit levels in community banks return to normal levels following the pandemic highs, banks are compensating by returning to wholesale funding.
The FHLBs’ structured advances offer convenience and a known counterparty. But banks may pay a premium.
“We find that it is typically less expensive to purchase the same derivative without embedding it into the borrowing product itself,” Tevis says.
Cuppia said approximately 30 percent of the banks Chatham works with are hedging rising rates, to limit volatility on the liability side and also in their bond investment portfolios. With rates close to zero during the pandemic, those banks often invested in longer-term fixed-rate bonds with higher yields, he adds, and now they are hedging against the incremental price risk of rates increasing and corresponding bond prices falling by paying fixed on interest-rate swaps that will gain in value as rates rise.
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