Many community banks tell us that in this rate environment, plenty of commercial customers seek the stability of a fixed loan coupon.
Valued for their flexibility, forward rate lock agreements can be customized to fit the requirements of both your bank and your borrower.
Financial hedges are a bit like shock absorbers on a car.
With a flat yield curve, certain tools can provide customers with the products they want while mitigating risk for the bank.
This gives the customer a locked in fixed rate (less credit risk) and the bank has positioned itself for higher interest rates (less interest rate risk) through a floating rate structure.
PCBB has an interest rate swap hedging solution designed specifically to assist community banks with loan hedging.
The bank was seeking to protect itself against interest rate risk using interest rate swaps, as it served its business clients by offering them fixed rate CRE loans.
LIBOR is widely used for interest rate swaps, deposits, foreign currency options and loans, to name a few areas.
Specifically, Hoeing is calling for lighter regulation for banks that don't hold trading assets or liabilities, banks whose derivative positions are limited to interest rate swaps and foreign exchange derivatives and those with less than $3B of derivatives exposure.
The short answer is to do so through interest rate swaps, since banks are compensated mostly for taking credit risk in the loan portfolio and not interest rate risk.