

Tumbling Interest Rates in Europe Leaves Some Banks Owing Money on Loans - pmcpinto
http://www.wsj.com/articles/as-interest-benchmarks-go-negative-banks-may-have-to-pay-borrowers-1428939338

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adaml_623
The thing is that the bank is still doing OK out of this (as is the customer
obviously).

Banks have the ability to raise capital. Then they can do something with the
capital or they can leave it in the bank, in this case the central bank, who
would give them negative interest. If they lend it to a customer who buys a
house then they will get slightly better return on their capital with that
customer (Trying to avoid the term "a less bad return").

As long as it's a temporary thing then the banks will ride it out and the
customers will remember it fondly.

~~~
URSpider94
Most banks raise capital by holding deposits from customers. If the bank now
tells me that it's going to charge me -1% for my savings account, I'm going to
pull that money out and keep it in a safe.

Think about how aggressively banks compete on "no fee" accounts, and how
aggressive customers are about moving their money to avoid fees. Mint, for
example, practically sounds an alarm on my phone whenever I get charged a bank
fee.

~~~
thaumasiotes
You might think twice about the safe if you had to keep, say, $800,000 in
there.

~~~
URSpider94
1% of $800,000 is $8,000. I can rent multiple large safe deposit boxes in that
same bank, with plenty of room for 8,000 $100 bills, for a few hundred $ per
year.

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msandford
I'd like to borrow 100 trillion dollars please. I won't actually do anything
with it, so you don't need to worry about my credit or ability to repay. In
fact, I'll happily keep it in my account at your bank!

~~~
maxerickson
I think if you don't have 100 trillion in assets to secure the loan with they
might not give you the favorable rates that people got on these mortgages.

~~~
msandford
Do the 100 trillion in assets have to be marked to market, or can I make up
whatever price I'd like and they have to accept it as valid? If it's the
latter, that'll be no problem at all!

~~~
maxerickson
I expect the banks would want to value the assets themselves.

~~~
msandford
I know, I'm making a tongue-in-cheek reference to the banking crisis in 2008
where for a time the banks didn't have to mark their assets to market, but
were instead allowed to hold them at "other" valuations.

~~~
fennecfoxen
Mark-to-market really is the best thing since sliced bread -- until you end up
with a liquidity crisis and the only market left is fire-sale prices, in which
case it just amplifies the crisis and (further?) undermines the entire notion
of banks being risk-tolerant entities who are in business for the long haul
instead of just chasing after the next quarter's results.

Much like in 2008.

This isn't a problem with an easy answer.

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troels
Zero is an arbitrary limit - It may have a psychological signal, but there is
no reason it should be more shocking that the rates drop under zero than when
they dropped under 0.1% or any other number.

~~~
ojbyrne
Time value of money - meaning that its better to have a $1 today rather than a
$1 tomorrow - isn't really an arbitrary thing. If its not true, then we have
deflation.

~~~
thaumasiotes
There are two concepts here:

1\. $1 today might buy you less stuff than $1 tomorrow would. For example,
maybe today $1 will buy you three today-apples, but tomorrow $1 will buy you
five tomorrow-apples. This is arbitrary. The example shows deflation in
apples, but there's no reason, a priori, that today should be better or worse
than tomorrow, whether measured in apples or any other dimension. Maybe
tomorrow $1 will get you two tomorrow-apples.

2\. Under the assumption that the buying power of $1 is fixed and eternal, $1
today is _necessarily_ better than $1 tomorrow because you have more options.
Among other things, you might die later today. This phenomenon can't reverse,
it can only make earlier money (or anything else) more valuable than later
money. But it's not the same idea as #1.

Deflation is an idea related to concept #1. $1 today being better than $1
tomorrow is concept #2.

~~~
fennecfoxen
The traditional point made for #2 isn't about the fact you could _die_ but
more that $1 today could be invested in some profit-making enterprise
(directly or through a bank account paying interest).

For a concrete non-financial-system example, $1000 today could let you re-
insulate your home, saving you $250 over the course of the next winter. Every
year you put off that $1000 then costs you around $250 (modulo any
depreciation and the variability of heating costs).

The thing that's a little different with the banking system is that you're not
just getting paid for the time value of your deposited money and the returns
it could get in the economy writ large, you're losing a little bit for the
sake of safety (deposit insurance) and liquidity (you can withdraw money from
a bank account any time, unlike if you had issued a mortgage loan directly
yourself).

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chkuendig
Why would banks lend to homeowners at less than 1% spread? That seems
extremely low.

~~~
dagw
A mortgage is basically a commodity, so a as long as you have several
competing actors margins should approach zero. Secondly banks can bundle a
bunch of other services together with a mortgage so they can condition the low
rates on the customer buying into other higher margin products .

~~~
drjesusphd
> A mortgage is basically a commodity, so a as long as you have several
> competing actors margins should approach zero.

No, it should approach the chance that it won't get paid back, which is
decidedly not zero.

~~~
dagw
The margins the banks make should approach zero, and that takes into account
the fact that sometimes they'll get back slightly less than they lend out.
However to get the type of interest rates we are talking about here you can
probably only borrow at about 75-80% the price of the house and only for a
relatively secure house, so the expected payback for the banks is pretty close
to 1.0.

~~~
URSpider94
Would you like to explain that to all of the American banks who lost billions
of dollars when housing prices crashed?

Also, when a customer defaults on a mortgage, the bank gets "one house", not
the cash value of the house. The bank then has to care for the house, list it
with a broker who takes a sales commission, pay property taxes on the house,
fix any damages that the prior owner may have left, and sell the house (which
in the US housing crash meant competing against dozens of other foreclosures
on the market in the same neighborhood).

~~~
dagw
_when a customer defaults on a mortgage, the bank gets "one house", not the
cash value of the house._

In the US. We're talking about Europe here and the laws are different. But in
most parts of Europe you can't just hand over the keys to your house and be
clear of your loan.

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ghshephard
What I wish all these stories would do is capture what the net-impact is at
the end of the month after all the fees are considered.

For example, is there anyone who has ever _netted_ a positive return at the
end of the month?

~~~
GFischer
Banks have quite a few tricks up their sleeves.

I know of some cases where they massively mark up the life insurance policy
fee % for their loans (particularly mortgages such as in this case), it's not
such a significant fee but it's very profitable and it adds up (and more than
offsets the interest rate loss I guess). You can hypothetically switch life
insurance providers, but they probably don't even have a procedure and the
bank would end up declining your loan.

~~~
pvaldes
This is interesting, so this mean that you can not change the insurance
company of your house offered by the bank to other company during the mortage?

~~~
GFischer
I'm talking about life insurance on loans (Mortgage Protection Insurance), not
fire or house insurance on mortgages which is much more flexible.

Also, it depends on the bank. I'm pretty sure it must be much easier in the
U.S., the cases I know of are in South America (they basically won't give you
the mortgage unless you use their approved overpriced life insurance, which is
very low compared to the principal anyways).

It seems that it's a little less dodgy in the U.S., but not too much:

[http://www.investopedia.com/articles/personal-
finance/052014...](http://www.investopedia.com/articles/personal-
finance/052014/why-you-dont-need-mortgage-protection-life-insurance.asp)

Edit: a related case in Canada:

[http://thetyee.ca/News/2015/04/15/Insurance-Giant-
Defraud/](http://thetyee.ca/News/2015/04/15/Insurance-Giant-Defraud/)

Edit: exactly what I'm talking about, an English example

[http://www.consumeractiongroup.co.uk/forum/showthread.php?39...](http://www.consumeractiongroup.co.uk/forum/showthread.php?396772-Is-
Life-Insurance-compulsory-on-a-mortgage)

Edit: another example of how banks use other products to drive profits, but
this one misfired:

[http://www.thisismoney.co.uk/money/markets/article-3035922/B...](http://www.thisismoney.co.uk/money/markets/article-3035922/Banks-
forced-pay-billions-compensation-mis-selling-payment-protection-
insurance.html)

Wikipedia article:

[http://en.wikipedia.org/wiki/Payment_protection_insurance](http://en.wikipedia.org/wiki/Payment_protection_insurance)

" the insurance would commonly make the bank/provider more money than the
interest on the original loan, such that many mainstream personal loan
providers made little or no profit on the loans themselves; all or almost all
profit was derived from PPI commission and profit share "

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gilrain
I'm sure their respective governments can do something about this tragedy. The
banks always win, everyone else always loses; that's Capitalism 101!

