Why 5yr-GIC (2.6) is lower than market rate(3.0)? | Peoples Trust | Discussion forum

Hi Charlie,

Great question! The short answer, and obviously there a number of variables that can affect this, is simple supply and demand. With an investor marketplace still risk averse from 2008-2009, public money printing (i.e., lending) through so-called "quantitative easing" from the U.S., Europe and British central banks and a low demand for mortgages, it's forced down the price of mortgages to sub-3.0% on five year, closed fixed-rate mortgages in many cases and geographic areas.

Banks make money on the "spread", or net interest margin which translates to their net interest income on their consolidated income statements, between what they lend (i.e., consumer financing and mortgages) and what they borrow (i.e., pay depositors or wholesale credit debt markets) at. There's an excess in supply on the deposit side and, thus, they can't pay and don't need to pay higher deposit rates. As well, complicating things, it's cheap to borrow on the wholesale credit (debt) markets as well (though, generally, not quite as cheap as the deposit market). On the plus side, banks are being required to hold more capital on their balance sheets in relation to the relative risk their assets (i.e., mortgages) carry (called "risk-weighted assets") in terms of global capital adequacy rules (you may have heard of "Basel III" guidelines). That's largely why we saw Scotiabank buy ING Direct for its deposit base. RBC, by contrast, was more deposit heavy and needed to bulk up in assets so it bought Ally mainly for its consumer lending and dealer financing portfolio.

That, in a nutshell, pretty much sums it up.

Hope that helps,
Doug