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S&P Global asks Todd Cuppia how banks can protect their margins if interest rates fall

Date:
December 23, 2022
Source:
S&P Global Market Intelligence

Summary

Though banks have seen their net interest margins jump due to Federal Reserve rate hikes, there are signs that the Fed could cut rates as soon as 2023. S&P Global Market Intelligence talks with Todd Cuppia about how banks are moving now to protect their margins if rates should fall.

Banks are using "vanilla" hedging strategies to protect themselves if rates fall, including interest rate collar transactions, interest rate swaps and purchasing floors, which will allow them to replace some of the lost income from falling rates

Todd Cuppia in S&P Global Market Intelligence
Read the S&P Global Market Intelligence article

As of now, many banks are asset sensitive and positioned to benefit from rising rates, but they will need to be ready to protect their margins against falling rates by sometime between the midpoint of 2023 and early 2024, said Todd Cuppia, a managing director at the financial risk management company, Chatham Financial. Clients of Chatham are heeding this advice. About 80% of the hedging activity Chatham has facilitated for clients in recent months has been against potential falling rate exposure using such instruments, he added.

Banks are using "vanilla" hedging strategies to protect themselves if rates fall, including interest rate collar transactions, interest rate swaps and purchasing floors, which will allow them to replace some of the lost income from falling rates, Cuppia said.

Depending on the structure they use, it is even possible for banks to benefit if the Fed lowers rates without mitigating exposure to rising rates, Cuppia said.

"That gives banks a way to sort of protect themselves as rates fall, but continue to benefit if that forecast turns out to be incorrect and rates continue to rise or don't fall as anticipated," Cuppia said.

Interest rate risk expertise for financial institutions

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