Derivative Path CEO Stresses Critical Financial Risk Management

The demise of Silicon Valley Bank (SVB) has caused turmoil throughout the start-up ecosystem, of which it was an integral part, and throughout the regional banking industry, of which Derivative Path is an integral part.

The importance of regional and community banks has suddenly become a hot topic. These smaller banks are essential not only to the communities they have served for decades but also to the overall health of the United States economy. Some of these banks are even older than the largest banks in the US. These smaller banks do a lot that large banks often don’t or won’t, and their bankers are the financial backbone of their communities. We count those bankers as neighbors, friends, and family!

Derivative Path works with over 200 such banks. While the collapse of SVB has undoubtedly increased the focus on interest rate risk, it is important not to throw the baby out with the bathwater. We see every day how vigilant regional and community bank leadership teams fully engage in various aspects of risk management to guard against the risks they face.

We actively engage with our bank clients to help them manage various risks. In addition to customer hedging programs, we saw a tripling of balance sheet hedging activity in 2022 as our clients executed strategies to reduce the volatility of their earnings and to mitigate the impact of rising rates on their investment portfolios. Many of our bank clients have ongoing customer and balance sheet hedging programs with existing positions that recognize even greater benefits.

Many lessons will be learned from SVB’s undoing and the ripples it has sent through the banking sector. Among them must be the understanding that interest rate risk management may be as important as credit underwriting. Just as banks don’t want to underwrite bad loans, they should not take on excessive interest rate risks. Fixed income markets can and do move fast and furiously during volatile times. Interest rate risk management is not a binary task; it is a dynamic, ongoing task that must be considered within the totality of your overall asset liability management objectives. It is critical not to be caught unhedged when macroeconomic or geopolitical conditions force monetary and fiscal policies to quickly reverse course.

At Derivative Path, we help financial institutions, investors, and companies successfully manage financial risks—be it interest rate, foreign exchange, or commodity price risk—for their accounts or on behalf of their customers who have these exposures. We have a strong track record of doing so, and we welcome the opportunity to assist in selecting and implementing strategies custom-tailored to the objectives of each client we serve.

Pradeep Bhatia

CEO, Co-founder
Derivative Path