Can anyone shed some light on these queries ? :
1. Where do our banks borrow from , and what does it really cost them ?2. Who should banks look after first – customers or shareholders ?
Re Q1. What does it really cost banks to borrow or source funds overseas or locally, to lend to us for housing loans or commercial loans ? They keep telling us how expensive it is for them to source funds to lend to us. Then we see news items about the low base rates overseas of various countries' RBA equivalent of our cash rate, or whatever they call it in those countries. Some countries are around 1%. Wow ! Must be nice to borrow from their Banks.
Re Q2. Why do we get the double talk from Banks about how important we are as borrowers and customers, and when we cry about their $6 billion profit, they tell us their first loyalty is to shareholders. They probably tell the same story the other way around to shareholders when shareholders ask for a better dividend. So who comes first, the one who provides the profit, or the one waiting to be paid a share of the profit ? Can't help feeling like we're being milked dry by a long line of spongers – starting with banks.
No wonder so many Aussies struggle and fail to get ahead of the cost wave and break free.
Unimpressed
thecrest
thecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Meselling motels in NSW
Good questions!
Ive mentioned this before but a friend of mine in the banking sector told me that he margins on home loans at the moment are only about 1%….
Answers will vary but i think in answer to your other question customers should come first. no customers no business…
I'll start with a short answer – as a long drawn out explanation of the money & fixed interest markets is too involved for me to type today!
Generally, with the major lenders, 50 -60% of the moeny they lend us comes from the 'money markets' – with the rest from over the counter deposits. IN the case of fixed interest rate loans, generally these are all sourced form the markets, not deposits; which is why break costs need to be paid when we want to break the contract we agreed to with the lender. Some banks borrow some of their money from short term markets too, such as 60 or 90 days, rather than longer periods – which is a more volatile sentiment driven market, with rate changes. What happened with many of the 'non bank lenders' pre & post GFC is they could not pay bakc what they had already borrowed, and could not 're-borrow' funds again any where near the same interest rate, thus…….you get the picture. They don't (can't ) borrow generally at the 1% in the example mentioned, as that is not the cost of funds from the 'wholesale' money markets.One of the major complaints the banks have, is that what they offer on a term deposit, or on line saver in the case of their own funds they lend, is not enough margin to allow for profit and risk against the rates charging for lending.
I realize that is a general explanation, but hope it helps.Cheers
banks don’t have money of their own, it comes from various sources like deposits, shares sold/equity raising & borrowings from the money markets.
If a bank has a margin of 1% that would mean 25% or so above the 5% that the reserve bank has set as their rate.
Banks are companies, not charities, they are in it for the profits. Therefore they should do everything they can to increase the profits (within the laws of course). The directors also have duties, under the corporations Act, to do their best to make profits for their shareholders.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Sorry guys, as an economist, I make a great motelier. So I'm confused.
Re Q1 – Where do our banks borrow from , and what does it really cost them ?
By your answers, does this mean that our banks borrowing costs are not related to the cash rate or recent .50% RBA rise? – hence all the RBA has done is give banks the signal to increase their lending interest rates charged to Australians irrespective of the bank funds coming from overseas, locally or the "money markets (wherever they are) ? Is the RBA just throwing a bone to the banks, or is it accidentally throwing thewm a bone while genuinely trying to prevent the anticipated inflation ?
Or is it something else, is there an elephant in my room ?
cheers
thecrestthecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Meselling motels in NSW
Yes Crest, banks don't borrow from the reserve bank (long time since I did economics, we were only talking about implementation of the Campbell report, so I stand to be corrected). The reserve bank sends out its signals (based on the economic data available) and uses the sledge-hammer available (ie monetary policy) to effect a tightening/loosening of cash rates in the economy. A change in the risk free rate will affect the whole economy not just the overheating or slow sectors.
Banks get their money from basically four sources:
1. Long term Wholesale Funding
2. Short term wholesale funding
3. Deposits
4. SecuritisationSecuritisation is gone for all intents and purposes. Deposits are self explanitory. Wholeale funding comes from other financial institutions both domestically and internationally. Prior to the financial crisis the average cost of wholesale funds on LIBOR (in the UK) was something like 0.05%, this jumpred to about 1.5% directly after Lehman Brothers collapsed, and is currently something like 0.6%. The average time period is something like 3 years, so there is money rolling off very low margins into much higher margins every month, the banks are also being asked to fund a higher percentage of their balance sheet with longer term funding so that they are not as subject to short term occurances in future, they have to pay higher margins as the term gets longer. I hope this is reasonably clear.
What nobody seems to have answered is bank funding costs go up and down and in addition they still have a relatively large pool of low interest deposit funds to draw on from. So whether their true funding costs have gone up will depend on the funding profile of the bank
The question I have is when their “funding pressure” subsides I assume they will be reducing rates independent of RBA cash rate movements?.
Your info is helping a lot, but I've been a while trying to understand it, there is light at the end of the tunnel,sorry it's not my forte.
So I assume this means that the banks get funds from the following :
depositors of all kinds, anyone who places money in a bank such as term deposits, businesses depositing their daily takings, mum n dads small accounts, loan repayments, slow clearing cheques (grrrr), and all the other myriad of reasons why money is passing through the banks hands and then there are the funds they access from outside Australia. It seems to me that these overseas funds are the ones they claim are expensive, perhaps because we already know how much they pay us for our money inside Australia,, but it's too difficult for us mere mortals the general public to find out the truth about exactly how much the banks pay for this overseas money.
This enables them to spin us any story they like about how expensive overseas funds are.Am I reading this right ? Some one straighten me out please, appreciate it.
Cheers
thecrestthecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Meselling motels in NSW
Alot of it is just spin. Funding costs may be going up but also the banks are using this in my opinion as an opportunity to recover lost profit margin. Think about the fact that if you were an overseas lender would you lend to a usa bank or a an australian bank with a government guarantee?
The fact remains there is so much complexity in bank funding not many people know the truth….
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