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n. Illinois | I had the interest rate swap described to me by someone pushing it for our bank to participate in
We offer the fixed rate to the customer but do not want the risk of rising rates. So for a fee (which is priced into the loan to the customer) we pay to another larger financial institution (never describe who this bigger financial institution is) we get a promise that if a certain index or rate goes up by a certain amount that they would pay us cash so in essence we have a variable rate. So I asked the logical question the larger institution doesn't want the fixed interest rate risk either so what do they do? Well for a fee they sell the risk to a bigger institution. and so on and so on. So in the end its a game of Hot Potato no one wants to be caught with the hot potato. Well since this concept had begun back in the late 1980's or 1990's guess what interest rates had done. They have just gone down and that means no one ever had to payout any real money on massively wrong interest rate bets. So everyone involved just keep making fee income and never have to actually payout. Oh and one more detail that no one is willing to talk about. Everyone of these deals is limited to a set number of years. 3 years, 5 years 10 years etc. The longer you protect the more it costs etc. No one is actually buying rate protection for 30 years on a 30 year fixed rate.
Yet Fannie and Freddie and in the Ag world Farm Credit all finance those 30 year fixed rate loans with bonds that have an average life of maybe 3 years. Agri Bank discloses their average bond maturity in their annual financials but they also will tell you that all of their assets loans to the local associations (Farm Credit of America, Mid America Compeer etc etc.) are all variable rate deals which is true. But those Local associations are loaded up with Fixed rate loans (FCS America disclosed several years ago that like 60% of their real estate deals were on fixed rates ) So if there is a spike up in rates Agri Bank is just going to pass along the increase but the local associations are going to be stuck with a ton of fixed rate loans paying less than what they are now borrowing at. I like to see if they can make this up on volume. Like I said earlier no one knows what happens when this happens. We know what happened in the 1980's the Farmer Borrowers paid up. We got a taste in 2022 when the Fed started raising rates and several Large regional banks failed because they had mis managed the interest rate risk between their assets and liabilities. | |
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Rolling over debt
