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Developing big bank hedging strategies at community banks

November 12, 2021
  • ben lewis headshot


    Ben Lewis

    Managing Director
    Head of Sales

    Financial Institutions | Denver, CO

As third quarter earnings wrap up, a few themes jump out: banks are still flush with excess liquidity; more banks released loan loss reserves as credit concerns begin to ease; loan demand is returning; and the rush of large M&A is at a fever pitch. But the keen observer will note another common theme: hedging. Here are three super-regional banks that highlighted their hedging activity in their earnings calls.

  • Regions Financial (Ticker: RF; $156B in assets) repositioned its hedging book by unwinding $5B of receive-fixed swaps and replacing it with shorter-term receive fixed swaps. Doing so allowed them to lock in gains from their long-term swaps.
  • Huntington Bancshares (Ticker: HBAN; $173B in assets) increased its NII in a +100 basis point scenario from 2.9% to 4%. They did so by terminating certain hedges and adding $6B of forward starting pay fixed swaps.
  • Citizens Financial (Ticker: CFG; $187B in assets) executed $12B of receive fixed swaps in 2021, including $1.25 since quarter end. Their goal is to moderate their asset sensitivity and bring forward income.

These banks use derivatives as a competitive ALM tool to optimize client requests, investment decisions, and funding choices rather than be driven by their associated interest rate risk profile.

Using derivatives to hedge the balance sheet brings advantages


It's efficient from both a timing and capital perspective. Citizen's Financial's CFO, John Woods, said, "We think it's a bit more efficient to do that (manage interest rate risk) off-balance sheet with swaps."


It's more flexible than changing loan and deposit availability and pricing.


It's often less expensive when compared to cash products.

If swaps are so great, why doesn't every bank use them?

Perception of riskiness

For a financial institution that hasn't used derivatives, it is easy to fall into the fallacy that swaps are a "bet" on rates. In a sense, though, all the bank's balance sheet is a "bet" on rates. When layered into the bank's ALCO conversations and tool kit, swaps are simply another tool to manage rate risk, not add to it.

Fear of complexity/unknown

Derivatives bring an added layer of complexity, but this is often overdone. By selecting an external service provider, like Chatham, you will have a partner to educate you and your board as well as to do the heavy lifting both upfront and ongoing. The bank can continue to focus on what it does best: thrilling customers and returning value to shareholders.

Competing priorities

Competing priorities are a reality, and if something is working, why bother with it? But growth comes from driving change, especially into areas where the bank can make small incremental changes before driving significant change – banks can transact swaps as small as $1M or less!

The reality is community banks can leverage the same strategies that these super-regional banks use to enhance yield, increase lending capacity, and manage excess liquidity.

Contact us

Interested in learning how to deploy these hedging strategies and more at your financial institution? Get in touch 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.