Getting Started with Swaps: Three Ways to Test the Water
When speaking to community bankers about derivatives, I like to test the audience’s receptivity to what has been called “the eleven-letter four-letter word” through a word association. I’ve noticed a change in the last decade.
If we go back 10 years, to the post-crisis era, the responses would have come back mostly negative with words like, “risky, complex and dangerous.” However, at a recent gathering of finance executives at community banks, it was clear that attitudes about swaps have shifted after a decade of ultra-low rates and margin pressure. Given the choice, not one respondent said they would avoid derivatives at all costs. Roughly half said they were already utilizing the instruments, while the remaining half expressed concerns about the accounting.
For banks looking to add derivatives as a way to manage interest rate risk, there are a wide variety of firms offering very different products and programs that can reduce the burden on a resource-constrained institution. These solutions can be grouped into three distinct methods for a community bank entering the derivatives “waters:”...
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