The Top Five Things That Can Go Wrong if a Bank Or Credit Union Does Not Hedge Its Exposure To Interest Rates.
Minneapolis, MN | January 10, 2024 | By: John Trefethen, Director and Co-Founder
This week’s top 5 list is the top five things that can go wrong if a bank or credit union does not hedge its exposure to interest rates.
Number 5 – Earnings Volatility – Interest rate movements can lead to changes in the value of a bank or credit union’s assets and liabilities exposing it to significant earnings volatility.
Number 4 – Net interest margin compression – Net interest margin is a key measure of profitability and is affected by the difference between interest income and interest expense. Unmitigated interest rate risk can lead to a mismatch between the rates earned on assets and the rates paid on liabilities.
Number 3 – Asset-liability mismatch – Changes in interest rates can lead to an asset-liability mismatch. For example, if an institution’s liabilities are more sensitive to interest rate movements than its assets, it may lead to financial losses if unhedged.
Number 2 – Capital adequacy concerns – Significant losses due to adverse interest rate movements can erode an organization’s capital base, jeopardizing its ability to meet regulatory capital requirements.
Number 1 – Market perception and investor confidence – Investors, regulators and stakeholders closely monitor risk management practices at banks and credit unions. If it is perceived that they are not effectively managing interest rate risk, it may lead to lost confidence among those groups.
Up next: Tune in next week for another top-5 list in the world of financial risk management.
Author: John Trefethen, Director and Co-Founder
Mobile: 612-868-6013
Office: 952-746-6040
Email: jtrefethen@hedgestar.com
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