When rates are zero, derivatives make every basis point count
Financial Institutions | Kennett Square, PA
SummaryBob Newman writes for Bank Director explaining how financial institutions with hedging capabilities are better equipped to protect their net interest margin and make every basis point count with the recent return to rock-bottom interest rates.
It’s been one quarter after another of surprises from the Federal Reserve Board.
After shocking many forecasters in 2019 by making three quarter-point cuts to its benchmark interest rate target, the data-dependent Fed was widely thought to be on hold entering 2020. But the quick onset of the coronavirus pandemic hitting the United States in March 2020 quickly rendered banks’ forecasts for stable rates useless. The Fed has acted aggressively to provide liquidity, sending its benchmark back to the zero-bound range, where rates last languished from 2008 to 2015.
During those seven years of zero percent interest rates, banks learned two important lessons...
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