Falling behind the competition? | Page 4 | EQ Bank | Discussion forum

Bill said
I thought it's been established here that bond rates, not central bank interest rate announcements, are what impact GIC rates. Far as I remember.  

As I recall, we've been given 3 explanations so far.
First we were told that retail rates anticipate expected BoC rates.
Then, when that proved unreliable (and anyone's guess), we were told they followed government bond rates.
Most recently, we have been told that they reflect a number of factors including but not limited to each FI's financial needs. We've also been told that each GIC is matched to a corresponding loan, which is obviously not necessarily true.

Take your pick.
I believe that it's always related to estimates of profit and loss over time, an alchemy of many factors, with a view to reporting periods, and that the average person will never be able to permeate these depths.
Make of it what you will.

I agree retail investors will never know with reasonable certainty what any one, or group of, FIs will do with their rates and why. It is obviously complex. e.g. need for funds of a certain term, competitor rates, GoC bond yields, etc.

Clearly NIM is a key factor in FI profitability, so they need to manage that with an appropriate spread between GIC rates and mortgage rates.

From a big bank perspective, there is a timely G&M article (behind paywall) by Robert McLister explaining rates for 5 year fixed term mortgages. https://www.theglobeandmail.com/investing/personal-finance/household-finances/article-will-fixed-rates-follow-bond-rates-down-mortgage-shoppers-want-to-know/ Apparently the closest proxy is the 4 year swap rate. Excerpt follows.....

The closest proxy is the four-year swap rate, which banks often use because it roughly matches the 3.8-year average duration of a five-year mortgage. Side note: Five-year mortgages only last 3.8 years, by the way, because borrowers break mortgages early.

Swaps are a better indicator of fixed-rate direction than the more commonly cited five-year bond yield for two reasons. For one, banks use swaps to hedge five-year fixed mortgages. For another, swap pricing incorporates bank credit risk, and the supply and demand for mortgage funding.

What is a swap?

It’s basically a swap of cash flows.

Without getting too far into the weeds, swaps let a bank convert its variable funding costs to fixed funding costs, to reduce risk.

Essentially, the bank makes a stream of fixed payments (which come from the fixed-rate mortgage borrower) to the swap counterparty and in return the swap counterparty pays the bank with floating payments at an agreed-upon rate.

The banks can then sell a five-year fixed mortgage at a higher rate, for example, and guarantee a fixed profit spread.

Banks use swaps in mortgage funding because so much of their mortgage funds come from the floating-rate market (for example, deposits, bankers’ acceptances, overnight loans, and so on). If banks didn’t use swaps, their floating rates liabilities could exceed their rates on fixed mortgages, and they could take a loss.
Where to find swap rates

The problem with swap rates is that they’re harder to find than the most common fixed-rate indicator, Canada’s five-year bond yield.

One place to look for four-year swap rates is RBC’s website: rbccm.com/en/expertise/fixed-income/notes-canada.page

It is pretty clear there are many levers that go into decision making on rates, both from an HISA/GIC perspective and mortgage rates.

The entire G&M article was worth reading for insight that I did not have before, that being another factor in the setting of GIC rates and mortgage rates. There is an awful amount of cash on deposit in chequing and savings accounts so the swap rate is important IF an FI has far too much disconnect between such deposits and fixed term mortgages.

I always believed there was a very strong connection between GIC terms and fixed term mortgages, and a strong correlation (measured in spread) to GoC bond yields of similar terms. I still believe in that correlation but swaps muddy the water somewhat, even if those correlations are more appropriately associated with the big banks rather than alternative lenders.

There seems to be a growing disconnect in recent weeks between big banks and smaller alternative lenders in longer term GIC rates. The larger institutions have either inverted the yield curve on their longer term GICs per the GoC bond yield curve, or are essentially flat across terms.... while the smaller alternative institutions still are showing the traditional northeast trend in yields vs term. IOW, the gap is widening at 3-5 year GIC terms.

I am not going to pretend to know nearly as much as you do on this subject matter so will obviously defer to you on your views of it.

What is ultimately telling though in a number of threads on this forum is the apparent lack of understanding* by so many folk on why FIs do what they do with their HISA and GIC rates. FIs are in the business of profitable operations and they will do what it takes to optimize profitability. GICs and HISAs are simply a source of debt for them and they will only do what they need to do to attract the funds they need.

Depositors are ultimately only commodities to them. Playing nice with their depositors is strictly a means of potentially attracting cheaper debt, i.e. me as a consumer perhaps willing to accept only 2% on a HISA deposit with a 'nice' company, than getting 2.2% with a 'brusque/rogue' company. No one should necessarily assume anything more.

* Or maybe it is simply an expression of frustration rather than actual misunderstanding.

AllanB said
All their excess deposits is courtesy of you the taxpayer from the phoney stimulus.  

Such positivity once again ...

savemoresaveoften said

Allan just provide us with a joke of the day every day past few days 🙂  

I'm just curious about his Corn Flakes ...

AllanB said

Corporate welfare has ballooned I think more was given to corporate teats than individuals in all of Canada this past couple years.

savemoresaveoften said

Allan just provide us with a joke of the day every day past few days 🙂  

They are laughing all the way to the bank  

And, some perhaps all the way to the farm ...

Been a while since we've had Conservative rule, plus everybody hates large corporations so would be hugely popular to increase corporate taxes meaningfully, so why haven't Libs, with NDP support, massively increased corporate taxes? Seems like an easy solution, everybody wants it, what's the hold up?