Since the rapid onset of the novel Corona Virus striking US and global financial markets, benchmark interest rates have fallen sharply. Over the past month US Treasury rates for 5 and 10 year securities have quickly moved to historic lows.
If your institution is using unadjusted US Treasury rates as proxies for market based cost of funding for loan pricing purposes within LoanPricingPRO®, it is recommended that you override these rate curves in the short term with one of a number of other available rate indexes, such as:
- The FHLB Advance Borrowing rate curve,
- The US Treasury curve with a Liquidity Premium added, sufficient to create an upward sloping curve, covering extension risk, or
- Assure strict application of rate floors at a level that fully covers actual funding costs, credit costs and direct operating costs plus minimum profit requirements.
You will find that each of these curves are available to you and are being updated for you on an ongoing basis within LoanPricingPRO®. If you need assistance in determining a minimum required rate suitable for use in the current rate environment for use as a rate floor, please feel free to contact us.
Due to the current shape of the US Treasury curve, the need for an adjusted cost of funding rate curve is most urgent for longer-term fixed rate loans, including 5, 7 or 10 year fixed rate loans, yet may apply to loans with shorter terms as well, depending on the structure of loans offered by your institution.
We would caution users of LoanPricingPRO® (or any other pricing software or pricing regimens, for that matter) not to be making long term pricing decisions at this time based on a (hopefully temporary) abnormally shaped curve. Using the actual US Treasury curve during this crisis will potentially lead to greatly reduced yields, lower loan margins and decreased bank profitability.
We have received numerous questions from LoanPricingPRO® users regarding pricing decisions being implemented by other community banks in response to the recent drop in intermediate and long term rates. The graph below shows data take from across our client base monitoring the shift in pricing that has occurred since the onset of the Corona virus pandemic.
The majority of the downward rate adjustments have been within a 15 – 20 basis point range however in some cases we have observed downward pricing adjustments approaching 40 basis points.
If you would like to discuss the specific application of these loan pricing principals within your institution during this most unusual crisis, please feel free to contact us at your earliest convenience. We’ll be happy to walk you through the process of adjusting LoanPricingPRO® inputs to meet the needs of your institution during these unprecedented times.