The Canadian banks choose to rebel against the Government of Canada direction to reduce interest rates. The Central Bank dropped rates by a half percentage point indicating concern about the economy and in an attempt to ease credit. However the Canadian Banks are choosing to keep 50% of the drop for themselves. Story at the Globe and Mail.
Banks trim prime but lag BoC cut | Globe and Mail
OTTAWA — Major Canadian banks said they would lower their prime rates by just a quarter of a percentage point, refusing to pass along all of the Bank of Canada’s half-point decline.
The rebellious move is a departure from the past, when the big banks have fully matched central bank rate cuts, despite complaints they couldn’t really afford it.
2 responses so far ↓
Dave // October 9, 2008 at 6:08 pm
Can anyone explain to me why interest rates aren’t higher across the board? If there is a crisis of confidence, and lenders are concerned that borrowers (including other banks, in this case) can’t repay, shouldn’t interest rates naturally be much higher than they are, to reflect that risk? Why have the credit markets “frozen up”, wouldn’t borrowing just become more expensive (i.e. higher interest rates)?
Colin // October 9, 2008 at 6:47 pm
Its a fantastic question, and it would be useful to learn from any real economists who might stop by - I am the armchair variety. To your point, bank - central bank borrowing has been as high as 8% in the last two weeks. Unfortunately that has the effect of increasing cost of capital for the undercapitalised banks, or at least thats their excuse. It actually only increases their capital cost on the margin. Most of their funding comes from yours and my retail deposits. Where it gets complicated and bankings secret comes out, are to the extent banks have securitised loans and sold them taking them off their balance sheet. Those securitised loans still have the banks name attached to attract AA (for now) rates.
This is very basis of the ABCP market. Once those loans are sold the banks has to fund their real and contingent liabilities with more and more expensive money bought on the open market so when t-bills actually hit 8% its crippling for banks.
Thats my rough explanation of why we won’t see higher deposit rates, but we will see higher lending rates. Its also why the governments’ are looking at injecting capital into banks as an alternative method of both reducing funding needs, and of introducing confidence.