# Please explain?



## tech/a (3 November 2010)

We have rising interest rates.
If the reserve bank doesnt rise rates the banks will on their own.

So how does it work (the so called cost of Money to banks)

Relative to UK or US or Japanese banks who have interest rates at under 1%
Where do they get their funds?

Hell they cant afford to get any funds according to our banks who keep telling us that money from O/S is Sooooo expensive??

It is???

.25%

Can someone explain this to me what am I missing?


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## medicowallet (3 November 2010)

tech/a said:


> We have rising interest rates.
> If the reserve bank doesnt rise rates the banks will on their own.
> 
> So how does it work (the so called cost of Money to banks)
> ...




Well in the US, the reserve meetings go something like this (Just watch the first 30 secs)

http://www.youtube.com/watch?v=kJ37PMfK9mU


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## prawn_86 (3 November 2010)

tech/a said:


> Can someone explain this to me what am I missing?




The fact that all the Big 4 banks reported record (or close to record) profits this year...


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## Boggo (3 November 2010)

Instead of the government getting mileage out of telling us that they are trying to rein in the banks they just need to relax the rules a bit and allow some more freedom to some of the foreign banks to create some competition.

Taxpayer guaranteed support for banks that pay their managers $60,000.00 a day and in the case of the Commonwealth Bank they get their ads made in America because "nobody in Australia understands how we want to present our product" is just ridiculous. 

Funny how Joe Hockey is very outspoken while in opposition, he was very quiet when his party were actually the ones who changed the legislation to give the banks the right to call the shots - sound familiar, same as what Paulson etc did with the lenders in the US ?


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## medicowallet (3 November 2010)

prawn_86 said:


> The fact that all the Big 4 banks reported record (or close to record) profits this year...




If you understand HOW these "profits" were generated, then you would realise that they are actually not bad at all.

Perhaps you would like to actually read some professional commentary on the issue before regurgitating today tonight mantra

http://www.heraldsun.com.au/busines...-bank-not-so-big/story-e6frfig6-1225944411811

Oh, and BTW, in an economy that is growing, all well run businesses should be reporting record(or close to record) profits every year.

It is just that the govt, and property speculators have egg on their face, that this is being singled out.

I am VERY sure that real estate agents and builders are profiting immensely too. How about we lynch them at the same time.


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## prawn_86 (3 November 2010)

medicowallet said:


> If you understand HOW these "profits" were generated, then you would realise that they are actually not bad at all.
> 
> Perhaps you would like to actually read some professional commentary on the issue before regurgitating today tonight mantra




I'm not having a go at the banks at all, but it would be interesting to see how well they would have done had they not raised rates above what the RBA did.

If a company can make profits of course i think they should do it.


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## doctorj (3 November 2010)

tech/a said:


> Hell they cant afford to get any funds according to our banks who keep telling us that money from O/S is Sooooo expensive??
> 
> It is???
> 
> ...



The RBA rates you hear about are the overnight cash rate for o/n AUD lending.  Banks do use o/n lending to finance short term cash needs, but the tenor of the bank's assets (loans) are, on average, much longer.  The longer tenor financing comes from long term wholesale funding and deposits.  

The rate banks pay for longer tenor funding depends on their credit rating, the tenor of the debt etc etc.

In many of the new EU countries, Banks exploited the difference in cost of funds in different currencies.  It was very common for Banks in Poland to raise funds in CHF and then use cross currency swaps to fund their PLN denominated assets. CHF funding plus the cost of the swaps was much cheaper than PLN denominated debt.  Then the swap market dried up at the same time PLN/CHF moved sharply against them, so they lost access to all funding.  In short, it's a risky strategy.


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## doctorj (3 November 2010)

prawn_86 said:


> I'm not having a go at the banks at all, but it would be interesting to see how well they would have done had they not raised rates above what the RBA did.
> 
> If a company can make profits of course i think they should do it.



The main short term funding banks use are 90 day bills.  They pay a premium to the RBA o/n cash rate to reflect the credit risk.  Pre crisis in Australia, a big 4 bank would pay a spread of around 0.07%.  This spread peaked at almost 1%.

The spreads on their longer tenor debt and deposits grew by even more...


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## professor_frink (3 November 2010)

doctorj said:


> The main short term funding banks use are 90 day bills.  They pay a premium to the RBA o/n cash rate to reflect the credit risk.  Pre crisis in Australia, a big 4 bank would pay a spread of around 0.07%.  This spread peaked at almost 1%.
> 
> The spreads on their longer tenor debt and deposits grew by even more...




Is there somewhere were we can get a detailed run down on this whole thing doc? Who provides the funding for the big 4, where does it come from, etc.

I kind of feel like I'm in the dark on the whole process and need some more information, after yesterday's effort from the CBA, Mrs Frink and myself are going to look elsewhere.


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## gordon2007 (3 November 2010)

Personally I don't care if the banks raise their rates. More $$$ for me. I don't owe any money to banks  so it's all working for me...at the moment.


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## tech/a (3 November 2010)

So other than cash deposits where do the banks get excess funds for expenditure for mortgage lending and business lending---long term.

If they need say 5 billion who do they negotiate with for the cash?
They would negotiate a term for X years.
As I see it they would have fixed loan costs at any one time or is it variable and how does it fluctuate.
Who governs this for the banks?

While Im at it what does the RBA function as?
When they raise interest rates that interest rate is for you and I through the bank loans we have.Effectively giving banks a pay rise if they are paying a fixed rate for loans they already have.


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## gordon2007 (3 November 2010)

tech/a said:


> When they raise interest rates that interest rate is for you and I through the bank loans we have.




Very simple solution. Get rid of all your loans and then you don't need to worry about it.


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## KurwaJegoMac (3 November 2010)

tech/a said:


> So other than cash deposits where do the banks get excess funds for expenditure for mortgage lending and business lending---long term.
> 
> If they need say 5 billion who do they negotiate with for the cash?
> They would negotiate a term for X years.
> ...




The interest rate set by the RBA is generally used for short-term funding, mostly for emergencies when a bank needs to tap into some funds to maintain its' minimum reserve (i.e. every bank must maintain a minimum amount of capital in order to service cash withdrawals and comply with government regulations. Should they drop below this minimum capital level, they must borrow it from another bank or the RBA). 

Banks generally do not borrow from the RBA for long term funding, except for exceptional situations, such as bailouts or to mitigate the risk of insolvency/bankruptcy. They generally never borrow long term to supply mortgages or anything of that nature. So the RBA interest rate should technically have no direct impact on a bank's mortgage rate, as it's not used as a source of funds for mortgages.

So while the RBA isn't used to back mortgages, it is still classified as a source of 'wholesale funds'. Other sources can include federal and public funds, deposits, as well as foreign deposits/banks. 

To answer your second point, banks will have a mixture of fixed and variable loans from wholesale funding sources. So when those funding sources go up in price, they pass on the price rise to the customer in order to maintain margins. 

In the case of the RBA, it's used mainly as a tool by the banks to help soften the rise in the eyes of the public. The reality is, that wholesale funding has been increasing before the RBA move - but the banks are hesitant to pass on the rise to the customer until the RBA make an increase so that they don't look as bad in front of the public (also wholesale funding costs fluctuate too, so they wait for some sign of stability before increasing/decreasing). 

Imagine wholesale funding goes up 0.25 b.p., in 2 weeks. The banks are technically well within their rights to lift interest rates by the same amount as soon as that happens- but they wont, because the public will accuse them of price gouging, greediness, etc when the reality is that their funding costs have gone up. What they'll do is wait for the inevitable increase from the RBA and then announce on the same day/week that the bank is increasing its' interest rate too (by enough to cover the RBA increase and the wholesale funding 0.25 b.p. increase from before - therefore it appears that the bank is increasing its' mortgage rate in line with the RBA increase, rather than independent of it)

This is what the CBA did because wholesale funding costs on the whole have increased more than what the RBA o/n rate has changed.


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## medicowallet (3 November 2010)

gordon2007 said:


> Very simple solution. Get rid of all your loans and then you don't need to worry about it.




WHAT!

Sell the Mcmansion?

NEVER!!!!


lol, the me mentality is coming to bite a few on the bum. In my day we built three bedroom houses.

Now minimum of 3 entertaining areas. 

House cost for Rudd $21k FHBG to build in 2009-10 $600000

Look on my face when I buy it off the bank in 2011-12 = priceless


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## nukz (3 November 2010)

medicowallet said:


> WHAT!
> 
> Sell the Mcmansion?
> 
> ...




This is true but you will be bidding aggainst me on that forclosure  lol in reality though i dumped my property's a few months back even then i saw waves. 

You gotta feel sorry for the single mum with the plasma tv in each of her 3 kid's bedrooms(45 months intrest free) and the 2 new 4x4's parked in the front yard.... 

I found there is so much emphesis put on rates in Australia, much more than any other country by the media. There is a perception that rates rising is the government kicking regular aussie's in the guts. 

Needless to say on this forum but the RBA is a private company.


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## againsthegrain (3 November 2010)

Id throw in a bid or 2 with you guys, but not against as there will be heaps to chose from if things go that way, oh no where is cyborg now in his sunny dungeon


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## gordon2007 (3 November 2010)

tech/a said:


> through the bank loans we have.




I'm really not having a go at you tech, but in previous posts you've mentioned before how you make more money on one trade than your employees do for a while year. And you've alluded in other ways that cash flow is not a problem. 

If these are true, then why on earth would you even bother with loans?


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## sinner (3 November 2010)

**** guys.

tech just wants to know why foreign banks can borrow at relatively low rates compared to ours, when according to our banks the cost of wholesale funding is rising.

The answer is simple:

Australian debt market, tiny. $150b of issuance a year. You can imagine US Treasury Secretary Geithner is issuing that much before he even opens his eyes in the morning. But we *need* it, and domestic demand is all tapped out. So to generate demand, we push yields (or, you could say, foreign investors are demanding higher yields).

That's all there is to it. We need the issuance to fund our current-account deficit and domestic investment, but demand isn't high without relatively high yield.

The scary thought is that almost half of the bank funding in Australia is generated in this way, and the possibility of us getting crowded out of the debt markets as more and more sovereigns and megacorps issue more and more fresh debt (McDonalds 30y at 0.65% anyone?) is growing higher and higher.

Many of the CEOs of the banks have claimed the absolute dependency we have on wholesale debt markets to be the Achilles heel of Australian banking sector. I agree with them. Money markets lock up again, banks can't rollover debt using short-term facilities, game over.


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## KurwaJegoMac (3 November 2010)

sinner said:


> The scary thought is that almost half of the bank funding in Australia is generated in this way, and the possibility of us getting crowded out of the debt markets as more and more sovereigns and megacorps issue more and more fresh debt (McDonalds 30y at 0.65% anyone?) is growing higher and higher.
> 
> Many of the CEOs of the banks have claimed the absolute dependency we have on wholesale debt markets to be the Achilles heel of Australian banking sector. I agree with them. Money markets lock up again, banks can't rollover debt using short-term facilities, game over.




Quite right. It's a disaster waiting to happen. A lot of financial institutions got caught with their pants down when the credit markets freezed up around the world, effectively cutting them off from wholesale funding. Should we have a second wave of that, Australia could be in for a world of hurt.

We've got an environment of low household savings, increasing reliance on wholesale funding and interest rates slowly starting to rise. 

...uh oh...


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## tech/a (3 November 2010)

gordon2007 said:


> I'm really not having a go at you tech, but in previous posts you've mentioned before how you make more money on one trade than your employees do for a while year. And you've alluded in other ways that cash flow is not a problem.
> 
> If these are true, then why on earth would you even bother with loans?




Where on earth have I said I have a cashflow problem?
I've asked for someone to explain to me how it works nothing more.
You have made assumptions which are way way off line.
I'm attempting to learn something about the big picture.

Thanks for the concern but no need to worry.


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## gordon2007 (3 November 2010)

tech/a said:


> Where on earth have I said I have a cashflow problem?.




Where on earth did I say you have a cash flow problem?


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## tech/a (3 November 2010)

gordon2007 said:


> Where on earth did I say you have a cash flow problem?






> And *you've alluded in other ways that cash flow is not a problem*.
> 
> If these are true, then why on earth would you even bother with loans?




Youve alluded to there being a problem??????
I bother with loans because they make me crap loads of money!
Longterm and short term loans.
Banks make $6 billion/year and according to them money they get is TOO expensive.
You dont have to be debt free to make good money nor do you need to be debt free to sleep at night.


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## Boggo (3 November 2010)

As Richard Branson said
"It sometimes seems to me that I have spent all my life trying to persuade bankers to extend their loans"


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## gordon2007 (3 November 2010)

tech/a said:


> Youve alluded to there being a problem??????
> I bother with loans because they make me crap loads of money!
> Longterm and short term loans.
> Banks make $6 billion/year and according to them money they get is TOO expensive.
> You dont have to be debt free to make good money nor do you need to be debt free to sleep at night.




Calm down tiger. I asked why you bother with loans, and now you've answered. It's really that simple. I never alluded to you having a financial problem. I thought you were big, old and ugly enough to handle a direct question...apparently I was wrong?


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## tech/a (3 November 2010)

Thanks Sinner what I was after.

No problems Gordon your still on my Xmas list.


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## Buckfont (3 November 2010)

This is an article an article from Terry McCrann in todays Daily Telegraph on the side of rate rises.

http://www.dailytelegraph.com.au/mo...e-rise-we-needed/story-fn300bzu-1225947016048


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## sinner (3 November 2010)

I think the whole issue highlights just how much of a scam is going down right in front of us.

Debt rollover. We pay the debt with fresh debt. This sort of thing, it works fine, until it doesn't.

That is to say, reality doesn't care about debt. Debt is a human construct, and therefore each dollar of debt has some nominal productive utility. Without proper management, the nominal utility of a dollar of debt becomes so low as to be in fact, unproductive. If this mismanagement is on a national or global scale, it doesn't matter if one person (or country) manages their debt well or not. The drunks have pissed in the sober peoples coffee pot, so to speak.

Eventually the fact that productive capacity is being stunted and stolen through this debt scheme becomes apparent in the economy, no matter what the numbers say (who wishes shadowstats had an Australian branch?). It isn't speculation, it's a simple mathematical certainty. 

Boggo, I can just see our banksters begging in front of their creditors to extend the loans "Australian householders are good for it!"..."are they? Whats your workforce consist of?" ..."um, well after we dismantled our manufacturing sector and the rich tourists stopped coming because of the exchange rate, our GDP comes almost entirely from stuff we export and household demand for imported retail junk"..."I see. Miners, clerks and politicians. Extension denied!"


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