Is a structural hedge the UK banks’ secret weapon?

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An often-overlooked financial strategy that could turn into an interest income tailwind for the next few years. What is the structural hedge and how are UK banks looking to benefit?

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Published on 26 October 2023

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

First things first, what is a structural hedge?

Just as you might want to lock in a fixed price for your future electricity bills so you don’t get shocked by higher rates, banks do something similar with their money. They want to avoid any nasty surprises when it comes to interest rate swings.

The easiest way to picture the hedge is like a bond portfolio. Banks use some of their assets to create a portfolio of bonds and earn a stream of cash flows at a fixed interest rate. In practice, this portfolio is largely made up of complex financial instruments, called swaps, but let’s not get bogged down in the financial jargon for now.

As rates in the real world go up and down, the hedge helps limit the impact of rate volatility and smooths earnings.

One of the ways banks make money is