Pub. 12 2022-2023 Issue 2

By Ben Lewis, Managing Director and Head of Sales Chatham Financial Financial markets have been rocked by significant volatility in 2022. Over the first six months of 2022, the 10-year U.S. Treasury rate jumped from 1.52% to 3.2%. A confluence of events is driving that volatility: increased inflation expectations led to more significant and soonerthan-expected increases in the Federal Funds rate, the uncertainty of the first military conflict in Europe since World War II, and the economy. Financial institutions are finding themselves in very turbulent waters. Banks prepared for this possibility are navigating these choppy waters with greater ease. They’re using prudent risk management tools, like interest rate swaps, to smooth earnings and protect against continued increases in long-term rates. Swaps create more flexibility for banks: they can be quickly and easily implemented and allow institutions to bifurcate the rate risk from traditional assets and liabilities. Most banks use hedging strategies that aim to smooth earnings. For example, banks use an interest rate swap to convert a portion of their floating-rate assets to fixed. They lock in the market’s rate expectations and bring forward future expected income. Navigating the Turbulence of Rising Rates, Inflation and Volatility Hedging tools allow banks to prepare before next quarter’s volatility — and potential rate change. www.coloradobankers.org 4

RkJQdWJsaXNoZXIy ODQxMjUw