S&P Global talks with Ben Lewis and Chris Funck about why customer hedging programs may accelerate this year
Summary
In a conversation with S&P Global Market Intelligence, Ben Lewis and Chris Funck explained why back-to-back swaps, a type of hedging program that allows banks to offer commercial borrowers fixed-rate payments while simultaneously laying off the interest rate risk, could accelerate this year after a dip in 2021.
S&P Global Market Intelligence"[A] lot of those headwinds are largely gone," said Ben Lewis, a managing director at Chatham.
Volume fell across asset-size categories in 2021 from a "high-water mark" in 2020, according to Chatham's annual statistical report on the swaps, as headwinds like soft loan demand and uncertainty over replacement rates for Libor prevailed. The programs can also be attractive to banks because they generate fees for originating and servicing the swaps, and average fees fell slightly across most asset-size categories in 2021.
Now, "a lot of those headwinds are largely gone," said Ben Lewis, a managing director at Chatham. Regarding the questions over reference rates, the "market has really coalesced around" the secured overnight financing rate, or Sofr.
Another big factor has been the shift in the interest rate environment, with policymakers' projections suggesting that substantial rate hikes were years away being quickly replaced by forecasts for a rapid string of increases in 2021.
Some banks may have been less interested in hedging fixed rates in 2021 "given how flush they were with deposits, given the expectation for the Fed to not really be raising rates at all," Lewis said.
Back-to-back swaps can serve as a complement to other derivative strategies banks employ to manage interest rate risk.
Interest rate risk expertise for financial institutions
Chatham’s holistic and transparent approach to interest rate risk management helps you consider all facets of a hedging solution. Through the support of our resources and extensive experience, you can optimize your balance sheet while offering versatile fixed-rate loan solutions.
