Why do retail banks tend to use govt bond yield curve vs wholesale banks that use swap curves?
As far as I know things, even a retail bank’s CFO manages IR risks by using swap contracs (just like wholesale banks) and hence, should also be (logically) using swap curves.
anyone?? Even I am looking for answer
Would be really interested to know the answer of this one as well
I think it is more a matter of general tendency and probability, rather than determinant statements.
Retail banks tend to have little exposure to the swap markets and are thus less likely to use swap rates. But that does not imply, that there isn’t a retail bank out there that uses swap rates.
Notice how the wording in the curriculum uses " probability terms", i.e. frequently and likely.
Section 3.2 in Reading 35:
3.2. Why Do Market Participants Use Swap Rates When Valuing Bonds?
…On the one hand, wholesale banks frequently use the swap curve to value assets and liabilities because these organizations hedge many items on their balance sheet with swaps. On the other hand, retail banks with little exposure to the swap market are more likely to use the government spot curve as their benchmark.
I imagine some “Mom an’ Pop”-Retail Bank somewhere in rural Montana, with a CFO that tells you: “I ain’t never heard of no Swap rate curve. Here in Montana, we use government spot curves. My grandfather used government spot curves, my father used government spot curves, and so do I, and so will my son. Always have, always will.” And as he reaches behind to show you a picture of his grandfather, you can see a tattoo on his neck that reads:
"Using Government spot curves to value bonds, since 1971"
lmao
Thanks for the great explanations!