Borrower swaps: a strategic opportunity for community and regional banks

Key takeaways:

• Strategic advantage: borrower swaps are essential for regional and community banks to offer fixed-rate loans, manage their own interest rate risk, and compete with larger lenders.

• Core benefits: swaps allow banks to win more deals, deepen client relationships, and generate valuable non-interest fee income.

• Implementation key: success requires strong operational readiness (legal, accounting, compliance) and clear borrower communication to manage risks.

In today’s competitive lending landscape, community and regional banks face pressure to deliver flexible, fixed-rate financing while managing interest rate exposure. Borrower swaps, financial instruments that allow banks to meet this demand, are gaining relevance. For institutions aiming to enhance client relationships, compete with larger lenders, and generate fee income, borrower swaps offer a powerful solution. 

The big picture 

As the financial backbone of local communities, regional and community banks serve small businesses, community and civic institutions, farms, and families with personalized service that larger institutions often can’t match. Borrower swaps enhance this model by enabling smaller institutions to offer sophisticated solutions without compromising their core strengths. Swaps help banks: 

• Retain and grow commercial relationships

• Offer competitive fixed-rate solutions

• Reinvest profits locally through expanded lending

Swaps are strategic instruments for managing risk, serving clients, and fostering sustainable growth. Banks that embrace them will be better positioned to compete, differentiate, and deliver long-term value. 

A strategy gaining traction 

Today’s market is defined by shifting sentiment, margin pressure, and rising demand for fixed-rate certainty. While many banks have swap programs, they may be underutilized or inactive. With market sentiment leaning towards higher rates, many borrowers are looking for longer-term certainty. So, now is the time to re-engage.

Swaps offer a way to:

• Win more deals

• Deepen commercial relationships

• Generate non-interest income

• Compete with larger institutions and non-bank lenders

Understanding borrower swaps 

Borrower swaps are interest rate derivatives that allow banks to offer longer-term fixed-rate financing without taking on the interest rate risk associated with an on-balance-sheet fixed-rate loan. With back-to-back swaps, the most common structure for borrower swaps, the bank originates a floating-rate loan while simultaneously entering into a swap with the borrower that effectively fixes the borrower’s interest rate. The bank then executes an offsetting swap with a dealer to hedge its interest rate exposure. The result is long-term fixed-rate certainty for the borrower, a floating-rate asset for the bank, and the opportunity for the bank to generate up-front fee income. When structured and executed properly, borrower swaps can align borrower financing needs with the bank’s interest rate risk management and revenue objectives.

Risks and considerations 

Because swaps carry complexity, banks must evaluate:

• Counterparty credit risk

• Operational readiness (legal, accounting, credit infrastructure)

• Reputational risk (clear borrower communication is essential)

• Market risk (misaligned loan and swap terms can create exposure)

Setting up a borrower swap program takes coordination, preparation, and training. It can be complex, but with the right expert partner, banks can streamline the process, avoid missteps, and build a program that works well for both the institution and its clients.

Since 2001, Chatham Financial has partnered with banks of all sizes to help launch, run, and grow successful customer back-to-back swap programs. We are the largest and most experienced non-bank provider of borrower swap support to regional and community banks.