Liability Sensitive Financial Institutions – Improvements to Cash Flow Hedge Accounting
The majority of medium-size commercial banks and most community banks are exposed to rising interest rates due to the natural composition of their balance sheet. They are often faced with high demand for fixed rate lending while they may not be able to secure long term fixed-rate financing of their own. As a result, they may alter their interest rate risk position by entering into pay-fixed, receive-floating interest rate derivatives to hedge their risk. These hedges are typically designated in cash flow hedging relationships against a variety of floating rate liabilities.