Responding to on-site examinations and inspections is of course a cost for community banks, but this cost must be weighed against the supervisory benefit of face-to-face interactions with bank examiners to explore and resolve institution-specific concerns.
Conversely, they must sell bonds when the price of bonds is falling. Put another way, they will always be reinforcing the current direction of the market and never “leaning against the wind.” Clearly, if these hedging-related transactions are large relative to the underlying market, the hedging strategy could make significant demands on market liquidity and lead to higher market volatility.