Accounting for Hedging a Financial Institution’s Commercial Fixed Rate Loan Program

Interest rate swaps were first offered by large money center banks well over three decades ago to help their clients hedge interest rate risk separate and distinct from an underlying borrowing or investing instrument. The product has grown in popularity over the last three decades and is now routinely offered to eligible commercial clients by banks with less than $1 billion in assets. While some borrowers may still prefer the simplicity of an on-balance sheet fixed rate loan without a swap, offering such long-term fixed rate loans may not be desirable for financial institutions if such fixed assets created a mismatch vs. largely variable rate funding.

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