1-2yr will be above 5% in Sept. hold the line | Page 4 | GIC discussions | Discussion forum

agit said
hmm then the Bank of England is wrong... OK  

inaccurate is not the same as wrong...

A bank takes in a deposit, apply a multiplier, and lends to out to whoever likes to borrow, and earn a spread, while taking some risk here and there.

So bank is a intermediary in the broad sense, and its common sense a bank's mortgage lending can not be 100% if you ask me.

want8tracks said
It's been mentioned somewhere earlier, and in other threads here, something that I would like some clarification about. It has been argued that if a bank has enough deposits to fund their loans and mortgages, they won't try to raise savings rates to entise more depositors.

But, I could be wrong, don't banks and credit unions also invest the money depositors bring in and rake in record profits each year on them while paying just a small portion of that back to the saver?  

Many statement in here reflects the authors point of view and personal feelings i would ignore them all unless are supported by facts and principles, in which case it becomes an argument. Always remember an opinion is not a fact. It's just a opinion

Many people with lots of money in the stock market and with large loans are Just in Denial with What's About to Happen. Global markets are in the beginning of a fundamental shift after a nearly 15-year period defined by low interest rates and cheap debt,

As well, bank and credit unions don't invest their deposits. They lend their deposits.

Deposits need to be returned on maturity or the bank/credit union fails.

What banks and credit unions invest are shareholder money. That's money from issuing shares and money from the past profits. Those record profits come from leverage.

A bank with $10 million of shareholder money may be allowed to do $100 million of loans. So, the bank raises $100 million of deposits and lends it out. A spread of +2% between the loan rates and deposit rates produces $2 million profit per year.

The $2 million per year profit on $10 million of shareholder money produces a 20% per annum return on shareholder money.

Next year, the bank has $10 million + $2 million = $12 million of shareholder money and can have $120 million of loans. Bank can then raise another $20 million of deposits and lend that out.

Bill said

agit, in reading your 2nd paragraph are we to heed your suggestion in your 1st one?   

Well said ⬆, Bill.

I believe the time honored rule of; "Do as I say, not as I do", applies here.

LOL

Dean

want8tracks said
It's been mentioned somewhere earlier, and in other threads here, something that I would like some clarification about. It has been argued that if a bank has enough deposits to fund their loans and mortgages, they won't try to raise savings rates to entise more depositors.

But, I could be wrong, don't banks and credit unions also invest the money depositors bring in and rake in record profits each year on them while paying just a small portion of that back to the saver?  

Bank uses some of its capital for trading purposes, can be bonds, fx, equities, commodities. Banks don’t ‘invest’ like a retail investor. An equity trading desk don’t buy BCE for its dividends and potential long term capital gain.
And even if a bank does ‘invest’ a depositors’ money and make a bandit out of it, there is no issues either, be it financial or ethical. A depositor chooses to accept the deposit rate, or just bluntly no guts to take the risk to reap the gain others can (in this case a bank).

The answer is Norman's post #65. Customer deposits are for lending purposes. The banks will risk manage the quantity and term of their deposits with that of their loan book (mortgages, HELOCs, demand loans, auto loans, business loans et al) and they do that with interest rate management (both deposit and loan side) and how much and who to lend too. I imagine the algorithms to do so are quite fascinating.

pooreva said

AltaRed said
Customer deposits are for lending purposes. 

OK. So what would be if depositors withdraw their deposits???  

Depending on the rate of withdrawals and the cushion the FI already maintains in place as part of their risk management process, the FI would need to raise rates to stem the tide and/or attract new deposits. A small CU with $0.5B in assets might work on the basis of tens of millions of dollars in fund movement while the larger CUs/digital banks with $5B in assets may work with hundreds of millions of dollars in fund movement (my amateur guess).

I am pretty sure that is what is going on when we see up/down rate revisions in the charts.

AllanB said

Topic Title; "1-2yr will be above 5% in Sept. hold the line"
  

It's Oct. 15th today ➡ https://www.highinterestsavings.ca/gic-rates/

Chrystal ball Busted?

Dean

Dean said

It's Oct. 15th today ➡ https://www.highinterestsavings.ca/gic-rates/

Chrystal ball Busted?

Dean

  

AllanB said "I never said which year" lol

Norman1 said
As well, bank and credit unions don't invest their deposits. They lend their deposits.

Deposits need to be returned on maturity or the bank/credit union fails.

What banks and credit unions invest are shareholder money. That's money from issuing shares and money from the past profits. Those record profits come from leverage.

A bank with $10 million of shareholder money may be allowed to do $100 million of loans. So, the bank raises $100 million of deposits and lends it out. A spread of +2% between the loan rates and deposit rates produces $2 million profit per year.

The $2 million per year profit on $10 million of shareholder money produces a 20% per annum return on shareholder money.

Next year, the bank has $10 million + $2 million = $12 million of shareholder money and can have $120 million of loans. Bank can then raise another $20 million of deposits and lend that out.  

Late to the party but banks do not need customer deposits to fund mortgages/loans. When a bank issues a new loan/mortgage new money is created (printed). The bank records the value of the loan as an asset on its balance sheet and creates a deposit for the loan/mortgage customer as a liability.

The main thing that constrains lending is capital requirements (primarily Tier 1 capital).
Tier 1 Capital is made up of Sharehloder's Equity and Retained Earnings (not customer deposits).

So why do banks want more customer deposits. Various reasons such as Liquidity management, asset liabilty management, regulatory requirements, etc. Each bank will decide what is the optimal funding strategy for themself.