Why banks should use interest rate derivatives
This 90-second video explains why community banks should consider interest rate derivatives as a competitive tool for asset-liability management and commercial lending.
Community banks use of interest rate derivatives has steadily grown. There are several reasons that’s the case. Growing comfort amongst regulators, simplified accounting standards, and greater market familiarity have all contributed to increased use.
But ultimately, community banks use interest rate hedging tools like swaps because they recognize they are a competitive tool for asset-liability management and commercial lending. With hedging as a tool, client requests, investment decisions, and funding choices can be optimized rather than driven by their associated interest rate risk profile.
For example, community banks use derivatives to meet borrower demand for long-term fixed rates through the use of a commercial loan swap program. This allows them to compete for more business, align their loan and funding costs, and generate fee income. Banks also use derivatives to manage balance sheet interest rate risk. Compared to on-balance sheet alternatives, derivatives are more timely, provide additional flexibility, are lower cost, and require less capital.
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If you would like to learn more about how your bank could use derivatives, contact us today.
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.
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