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Deposit pricing and liquidity at banks

Because of excess liquidity, many financial institutions modeled low deposit betas and assumed little to no changes in deposit pricing for the first 100 bps move up in Fed Funds. Now that the Fed increased the target rate to 1.50-1.75%, and is expected to increase it to 2.25% - 2.50% at the July 27 meeting, some are asking what is next.

On a June 28 webinar we held with the Financial Managers Society (FMS), 60% of respondents answered that deposit costs are their chief concern over inflation and recession. These concerns are pressing for financial institutions with high loan-to-deposit ratios. As of Q1 2022, banks with loan-to-deposit ratios greater than 90% were in the top decile for all commercial and savings banks in the U.S. For these institutions, the decision to use wholesale funding to grow the loan book may come sooner than later.

Those who want to manage this risk with fixed-rate wholesale funding should consider using an interest rate swap. This strategy may provide meaningful interest cost savings relative to similar maturity guaranteed term-financing alternatives. And unlike traditional FHLB term financing alternatives, realized gains on the swap may be monetized in a transparent and efficient process.

As depicted below, the bank uses an interest rate swap to lock-in the rate of rolling FHLB advances. Each period end, the bank renews the advance at the same time the floating rate of the swap resets. There is some basis risk between the advance rate and the floating rate; our team would be help you quantify that risk.

As depicted in the table below, the savings can be substantial.

Pricing as of 7/18/22.

FHLB Advance pricing from; savings will vary based on your FHLB’s advance rates.

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Financial institutions with the hedging tool in their ALCO toolkit can take advantage of these savings and proactively manage their balance sheets. Please reach out today.

About the author

  • Ben Lewis

    Managing Director
    Head of Sales

    Financial Institutions | Denver, CO

    Ben Lewis is a Managing Director and Global Head of Sales for our Financial Institutions team. He leads business development efforts in the Western U.S. and works with depositories helping them manage interest rate risk.


Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.