Bank ethics

[scottish]

I'm not sure this is anti-mustachian, but it certainly illustrates an attitude.

As you may have heard, the Bank of Canada dropped the prime overnight rate by 0.25% last week.   

The commercial banks are not, however, lowering their consumer interest rates.    Apparently this is somehow lacking in ethics:

http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/banks-fail-ethics-test-by-not-lowering-mortgage-prime-rates/article22642899/

To quote from Mr. Peter Noonan, a retired 56 year old teacher with a mortage:

On a scale of one to 10, with one being nonplussed and 10 being outright fury, it would be a 10.

This whole article seems wrong on so many levels.

Banks are going to try and maximize their profits.    Who ever heard of an ethical bank? 

56 year old teachers shouldn't have mortgages when they retire.   Or maybe they shouldn't retire when they have mortgages.   Or something.

If your mortgage makes you furious then stop being a complainy-pants and do something about it.

And finally, the last piece published by Rob Carrick, the author of this article, was titled:   "The message behind this rate cut?   Resist the urge to borrow more."

[minority_finance_mo]

The Bank of Canada dropped its overnight rate last week to add some stimulus to an economy that is weakening as a result of falling oil prices.

I don't see this as Anti-Mustachian at all. Mortgages and other low-interest debts can be good ways to leverage capital to use for investments that produce greater returns than the original debts. For those who are less risk-averse, this can be a smart financial move.

In fact, more telling is the finger-pointing attitude that comes across in a lot of posts in this section; being mustachian does not mean you automatically side with the mindless, profit-driven machine that is the modern corporation (or bank.) Actually, as an individual, you - by definition - operate strictly on the other end of the economic bargaining table as banks and corporations, so pushing back when they don't share the "economic stimuli" they receive is a fair reaction to have.

[sheepstache]

Theoretically, competition should mean one bank breaks ranks to offer lower rates and the others have to follow suit. That this hasn't happened smacks of price-fixing. That's what people are complaining about as being unfair, not the profit motive itself.

I don't know that market, of course. Maybe there's a glut of customers or some other reason lowering the rate doesn't actually make economic sense for the industry. There's a link to an article about that in this one that I didn't follow.

It's a good lesson to check the fine print of your business contracts.

[scottish]

I agree, the BofC move isn't anti-mustachian.   Lower interest rates are a common tactic to provide economic stimulus.

And it turns out that two Canadian banks lowered their interest rates today.   although they didn't lower them as much as the Bank of Canada did.

What bothered me about the article was 1.  complaining that banks are acting like banks and getting infuriated by it  and 2.  the mixed message from the author about borrowing.

[Indexer]

Do people not realize how banks operate?

Nevermind... dumb question.

Banks offer depositors X rate to park their money at the bank.
Banks offer borrowers Y rate to borrow from the bank.

X is lower than Y.  Bank keeps the difference, Z.

(I'm keeping this very simple on purpose.)  Supply and demand works for both variables.  Every bank wants to offer the highest X to get more deposit customers.  Every bank wants to off the lowest Y to get the most loans.  However they also want to have the highest difference possible between the two numbers, which we are calling Z.  The banks aren't all competing to see who can offer a mortgage at the lowest rate.  They are competing on 3 different variables that are all competing against each other.  If a bank has more than enough X, but not enough Y it might break ranks with all the other banks and drop X to zero and then also drop Y so it can take all the lending business.  Some customers will leave, but honestly the bank was probably losing money on those customers anyway.  Why do you think everyone hates Bank of America?  They had too much in deposits compared to loans a couple years back so they started 'passively' driving customers away at the same time they dropped rates on all their loans.   On the other end of the spectrum if a bank is struggling to stay afloat and the FDIC is breathing down their necks they might bump X way up to bring in new deposits to give them a greater cushion if they have been making bad loans.  A LOT of banks did this in 2009. 

Capitalism..... it works.

[dividendman]

If people are that upset about it, buy some RY or BNS. RY is yielding 4% at the moment.

As they say... It's better to have your money on the bank than in it!

[marty998]

Do people not realize how banks operate?

Nevermind... dumb question.

Banks offer depositors X rate to park their money at the bank. (A bank's interest income)
Banks offer borrowers Y rate to borrow from the bank. (A bank's interest expense)

X is lower than Y.  Bank keeps the difference, Z. (A bank's net interest income)

The problem in North America and Europe today is that X is essentially zero. So everytime a bank lowers Y it shoots itself in the foot and reduces it's net interest income (NII).

NII has to pay for:

- Bad debts
- staff expenses
- occupancy/rent
- IT costs
- capital and investment
- other expenses
- tax

some banks also have to pay for

- fines and penalties for bad behaviour

If there's anything left you, being the good bank/index investor that you are, will hopefully get a dividend out of the profits

[scottish]

Ayy, bank dividends are good.

[MgoSam]

I feel like teachers are dis-proportionally interviewed for their thoughts on articles such as these. Is it just me? I will say that many of my friends that are teachers don't have the keenest sense towards finance or other things, which is perfectly ok as they are in a completely different profession, but then why are they being interviewed for their thoughts on such things? I know that when they bring up something like an education standard, I really don't know anything useful or insightful about it, so will just listen and ask questions.

[RexualChocolate]

The issue here has nothing to do with ethics, but the contractual language in the ARM he signed.

If the bank indexed the ARM to the Canadian government's overnight rate + a spread, they should absolutely lower their rates and should be sued to enforce the contract.

However, it looks like the ARMs are linked to a market determined Canadian Prime rate. His ignorance of his own debt is no reason for an article.

As people mentioned previously, rates are so low that you've basically floored the time value of money at zero and Prime now just covers overhead which is already optimized meaning lower rates will no longer benefit consumers.

Additionally, the mortgage market is so manipulated by government intervention and kept artificially low that this type of rate dislocation is to be expected as we don't really have a free market for mortgage rates.

[scottish]

The banks don't use the Canadian prime rate for mortgages.   They define their own prime rate (i.e. the Bank of Montreal's prime rate) and then offer the mortage at prime + 1% to qualified buyers.

People just assume prime refers to the Bank of Canada's prime rate unless they read the fine print.