Reduce long-term funding costs with swaps

Many financial institutions have experienced excess liquidity over the last few years as a result of the pandemic and associated fiscal stimulus. However, a more recent pick-up in loan demand is causing institutions to think more about future funding needs. In this more “normalized” environment, financial institutions may need to access wholesale funding to continue making long-term fixed-rate loans like residential mortgages and commercial real estate loans. Short-term funding presents interest rate risk in a rising rate environment, and term FHLB funding typically results in higher costs for liquidity. While getting back to “normal” feels good, it presents risks to many financial institutions. Is there a solution?

Swaps provide financial institutions a tool to lower funding costs while managing rate risk

Here's how:

• Acquire short-term funding from FHLB advances or brokered deposits
• Identify amount and term of borrowing to hedge based on your risk profile
• Use a pay-fixed swap to convert the short-term funding to a synthetically longer-term fixed rate
• The swap can start today or in the future, allowing the financial institution to customize its risk profile
• Hedged exposure must remain outstanding through the life of the hedge
• The swap should match the resets of the short-term borrowings to achieve the best results

Result:

• Reduce term borrowing costs compared to traditional FHLB term advance rates, resulting in significant savings
• Own the upside in a rising rate environment in the event of prepayment of the funding (all or partial) and breakage of the swap
• Continue to grow and better compete for long-term fixed-rate loans when the need for liquidity is increasing
• Meet customer needs regardless of the rate cycle
• Lower capital requirements mean minimal impact on capital ratios
• Produce smoother net income

Chatham’s end-to-end interest rate risk management solutions provide the tools needed to meet fixed-rate loan demand, manage interest rate risk, and enhance earnings. Our experts collaborate with clients to identify the best strategy given their unique risk profile, views, and desired outcomes.

People

• Led by a client relationship manager who provides hedging advisory guidance and delivers the deep resources of our Financial Institutions team.
• Supported by a hedge accounting team with each client having a dedicated hedge accountant who helps with all the required initial documentation and ongoing testing.
• Backed by a regulatory/ISDA team to help negotiate derivatives documentation and keep our clients up to date on regulatory changes.

Process

• A collaborative approach to hedging decisions from strategy identification to execution to accounting.
• A proven ERM framework covering controls, processes, and regulatory compliance including SSAE-18 audit.

Technology

• Our online platform, ChathamDirect, is a modern, scalable, secure cloud platform.
• ChathamDirect provides efficient structuring, origination, and servicing for your entire derivatives program, backed by our market-leading processes, controls, and built-in Dodd-Frank compliance.