Managing excess liquidity
- March 11, 2021
Head of Sales
Financial Institutions | Denver, CO
Financial institutions are awash with liquidity
Due to COVID-19 restrictions and unprecedented fiscal support, many financial institutions are challenged with having excess liquidity. Paltry returns in the overnight market and low yields on the short end of the curve have caused many institutions to extend the duration of their assets. Some are offering long-term loans, while others are buying long-dated securities. In either case, banks and credit unions are increasing interest rate risk to improve current returns.
Swaps provide financial institutions with a tool to manage rate risk and protect NIM today and into the future
- Buy long-term bonds and/or lend long-term fixed-rate loans and reap the benefits of their current yields.
- Use a forward starting pay-fixed swap to hedge the “out-years”. Apply fair value hedge accounting to the swap to avoid earnings volatility due to its periodic changes in value.
- Use the strategy with an individual fixed-rate bond or loan, or a pool of fixed-rate assets.
• The institution receives the fixed-rate until the swap becomes effective converting the bond(s) or loan(s) to a floating-rate asset for the remaining term.
Chatham’s end-to-end Balance Sheet Risk Management solution provides the tools needed to manage interest rate risk. Our experts collaborate with clients to identify the best strategy given their unique risk profile, views, and desired outcomes.
- Led by a client relationship manager who provides hedging advisory guidance and delivers the deep resources of our Financial Institutions team.
- Supported by a hedge accounting team with each client having a dedicated hedge accountant who helps with all the required initial documentation and ongoing testing.
- Backed by a regulatory/ISDA team to help negotiate derivatives documentation and keep our clients up to date on regulatory changes.
- A collaborative approach to hedging decisions from strategy identification to execution to accounting.
- A proven ERM framework covering controls, processes, and regulatory compliance including SSAE-18 audit.
We'd like to hear from you
Contact us to understand how your financial institution can use swaps to enjoy the NIM benefits of longer duration assets in the short term, while managing the rate risk in the long term.
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.
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.21-0041
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Enhance yield with swaps
Excess liquidity in the financial system creates challenges for financial institutions. Balance sheets demonstrate greater sensitivity to short-term rates and NIM compresses.
Increase lending capacity
Many financial institutions have excess liquidity due to the global pandemic and resulting economic stimulus. Management can deploy this liquidity into new loan originations or the investment portfolio. Although bond returns are better than cash, a more attractive return may be provided from mortgage loans.