S&P Global asks Todd Cuppia how banks can protect their margins if interest rates fall
Todd Cuppia in S&P Global Market Intelligence
Banks are using "vanilla" hedging strategies to protect themselves if rates fall, including interest rate collar transactions, interest rate swaps and purchasing floors, which will allow them to replace some of the lost income from falling rates
As of now, many banks are asset sensitive and positioned to benefit from rising rates, but they will need to be ready to protect their margins against falling rates by sometime between the midpoint of 2023 and early 2024, said Todd Cuppia, a managing director at the financial risk management company, Chatham Financial. Clients of Chatham are heeding this advice. About 80% of the hedging activity Chatham has facilitated for clients in recent months has been against potential falling rate exposure using such instruments, he added.
Banks are using "vanilla" hedging strategies to protect themselves if rates fall, including interest rate collar transactions, interest rate swaps and purchasing floors, which will allow them to replace some of the lost income from falling rates, Cuppia said.
Depending on the structure they use, it is even possible for banks to benefit if the Fed lowers rates without mitigating exposure to rising rates, Cuppia said.
"That gives banks a way to sort of protect themselves as rates fall, but continue to benefit if that forecast turns out to be incorrect and rates continue to rise or don't fall as anticipated," Cuppia said.
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Our Balance Sheet Risk Management team assists in creating customizable strategies to help you manage specific asset and liability exposure to potential interest rate movements. We provide a full-service solution which encompasses structuring guidance, trade execution, accounting and regulatory support, and life of trade servicing.
We will also help you identify the best option in offering long-term, fixed-rate loan solutions to your borrowers. Chatham provides the flexibility to hedge individual loans or offer a back-to-back swap program that can handle any deal volume, from a single transaction to thousands of trades. Our support includes the full life cycle of a loan-level hedging transaction.
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