PUB. 11 2021-2022 Issue 2

coloradobankers.org 26 Rates Don’t Matter Much If You Have A Plan By Scott Hildenbrand and Ryan J. Smith Piper Sandler R ate volatility has been a common theme in the last 18 months – a global pandemic, unprecedented government spending, recession fears, recovery, a presidential election, and a vaccine, just to name a few. The 10-year Treasury yield saw a high of 1.77% and a low of 0.50% in those 18 months, with a 100+ bps drop in 13 business days from mid-Feb. to early March 2020. Financial institutions that live and die by their margins watched the fireworks while crossing their fingers that credit would hold out. In the last month, that same 10-year Treasury yield has retreated from recent highs to settle near 1.25%, continuing the margin compression that so many felt throughout 2020. This has made the 1.60%+ average seen in April and May feel like a market opportunity in retrospect. However, some institutions didn’t miss their chance because they had approved, implemented, and prepared strategies regardless of upcoming rate environments. That is to say, rather than looking externally at rates and predictions, the most thoughtful institutions looked internally at their own exposure and created a strategy that did not rely on a prediction of rates. At Piper Sandler, we believe in custom solutions for each individual balance sheet, and thinking of your bank’s exposure is more relevant than considering the past or future rate environment. For example, if your Asset/Liability report shows that you are heavily asset sensitive, you could react in two different ways: one, you could hope that rates go up; or two, you can reduce your asset sensitivity to balance your exposure up and down. We, as an industry, focus on rates. However, we also make statements that we “never bet on rates,” as banks know they cannot predict what rates will do. But each asset-sensitive or liability-sensitive balance sheet is making a bet on rates. A balanced A/L profile, as opposed to one exposed to a rate scenario, allows a bank to make tweaks or adjustments as rates shift, rather than sweeping course changes or major corrections. Bet on your bank, not rates; let your lenders and deposit gatherers create interest rate risk with the best products A balanced A/L profile, as opposed to one exposed to a rate scenario, allows a bank to make tweaks or adjustments as rates shift, rather than sweeping course changes or major corrections