Comments on: Unlike the US banks, Canadian banks hold back on dropping rates http://blog.communitylend.com/2008/10/08/unlike-the-us-banks-canadian-banks-hold-back-on-dropping-rates/ Starting the conversation about P2P Lending in Canada Tue, 02 Mar 2010 09:28:42 +0000 http://wordpress.com/ hourly 1 By: Colin http://blog.communitylend.com/2008/10/08/unlike-the-us-banks-canadian-banks-hold-back-on-dropping-rates/#comment-204 Colin Thu, 09 Oct 2008 18:47:09 +0000 http://communitylend.wordpress.com/?p=161#comment-204 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. 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.

]]> By: Dave http://blog.communitylend.com/2008/10/08/unlike-the-us-banks-canadian-banks-hold-back-on-dropping-rates/#comment-203 Dave Thu, 09 Oct 2008 18:08:21 +0000 http://communitylend.wordpress.com/?p=161#comment-203 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)? 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)?

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