The Successful Lender's Field Guide: Commercial Lending Strategies That Maximize Value For Both Bank and Borrower (Banking Guides Book 1) by Chris Nichols & Ed Kofman & Rick Ruso
Author:Chris Nichols & Ed Kofman & Rick Ruso [Nichols, Chris]
Language: eng
Format: epub
Published: 2017-05-22T06:00:00+00:00
ADVANCED LENDING TECHNIQUES: MAXIMIZE VALUE AND MINIMIZE RISK
From November of 2008 to December of 2015, the Federal Reserve kept the Fed Funds target in a historically low range of 0 to 25 basis points. The rest of the yield curve has also been at or near historical lows. Low relative rates are well known to commercial borrowers with a long-term view of their businesses. Thus, these borrowers typically seek long-term financing in the form of a fixed rate.
This borrower desire is at odds with every bank’s balance sheet structure, however. The rates you pay your depositor base are highly correlated with short-term interest rate movements. As a result, most banks struggle with how to manage future interest rate risk while maintaining the ability to meet the needs of commercial borrowers. Capital markets divisions within larger banks understand how this risk is mitigated and then communicate with lenders as to how they may deliver value to their borrowers. Many smaller banks, however, lack the tools or personnel with necessary experience to execute these strategies.
Regardless of bank size, there is a myriad of ways to structure loans to mitigate interest rate risk, all with unique positive and negative attributes. However, there are very few methods of structuring loans that allow banks to maximize value while minimizing interest rate, credit and liquidity risk. In this chapter, we will cover basic methods in loan structuring and then contrast those with strategies used by the largest banks to drive performance and relationship retention rates. These methods also result in the ability to tap an additional source of fee income while garnering wider spreads with embedded credit enhancements.
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