Hedging strategies to meet today's ALM challenges
Summary
With many institutions experiencing moderate net interest margin expansion, management teams' focus has shifted toward protecting those gains while preparing for uncertainty ahead. Community and regional banks and credit unions are increasingly using balance-sheet hedging strategies to stabilize earnings, manage downside risk, and preserve the benefits of stronger margins.
Why hedging matters now
Even as margins improve, the path of interest rates remains uncertain. Borrowers expect lower rates, competitive pressures keep deposit costs elevated, and the forward curve continues to shift. Maintaining recent NIM gains requires the full suite of ALM tools and the precision to use them to their maximum benefit, delivering predictable, consistent earnings results across a range of market conditions.
Derivatives allow ALCOs to lock in improved and stable margins, mitigate exposure to future rate moves, and better align asset yields with funding costs.
Recent history highlights gaps in traditional ALM approaches
Many institutions rely on "natural offsets," such as floating-rate assets versus non-maturity deposits, or securities duration versus term funding, to manage interest rate risk. But recent rate cycles have shown that these relationships can break down in times of market stress.
- Asset-sensitive institutions face downside risk if rates fall, particularly those with large floating-rate loan books. Floors can preserve yield through rate cuts.
- Liability-sensitive hedges can become misaligned if used without a full balance-sheet view, leading to redundant or ineffective protection.
- Securities portfolios remain vulnerable to unexpected rate increases, even among banks that have recently reduced unrealized losses.
Hedging strengthens ALM discipline and protects the margin improvement institutions have worked hard to regain.
The value of a strategic partner
For many community and regional institutions, interest rate risk management is just one of many competing priorities. Even highly capable finance teams often lack the time, systems, or daily market visibility needed to run a robust hedging program internally.
Partnering with an experienced hedging advisor allows banks and credit unions to:
- Leverage real-time market insight and execution expertise.
- Streamline policy, documentation, and regulatory compliance.
- Ensure that operational workflows, including collateral, payments, and accounting, run smoothly.
- Implement strategies that align with ALCO’s objectives, not just transaction-level needs.
With the right partner, institutions can manage risk more confidently, freeing internal resources to focus on growth, client relationships, and long-term strategy.
Chatham Financial helps financial institutions manage balance sheet risk by combining independent advisory expertise with an integrated, enterprise-grade technology platform. We partner with your team to design and execute interest rate risk strategies aligned with your ALM objectives, supported by advanced analytics, deep market insight, and comprehensive hedge accounting services. As the largest independent financial risk management firm, Chatham delivers objective guidance, transparent pricing, and end-to-end support to strengthen confidence in your balance sheet decisions.
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Disclaimers
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 chathamfinancial.com/legal-notices.
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