Trim rate reset risk in commercial lending through hedging

In today’s ever-changing economic landscape, credit unions face the challenge of managing interest rate risk while meeting the needs of their members, especially their commercial members. With interest rates fluctuating and borrowers seeking stability, navigating these complexities to stay competitive and protect relationships may seem difficult. However, by combining loan hedging and forward rate lock strategies, which we’ll explain more fully in the next section, financial institutions can mitigate rate reset risk, protect against unexpected rate fluctuations and ensure the financial well-being of their borrowers. This strategy can provide the same safeguards for your credit union, too.

The Power of a Forward Rate Lock

Forward rate lock hedges have become a valuable tool in the current interest rate environment, particularly for commercial real estate borrowers. FRLs allow lenders to establish fixed rates for future financing, protecting against rate changes before the loan begins or before it is due for repricing. These hedges are particularly beneficial when the yield curve is inverted or interest rates are rising, offering borrowers security and flexibility.

 

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