Saturday, Oct 07, 2017

BoE is limited

BBC: Cost of fixed-rate mortgages starts to rise

"The cost of taking out a fixed-rate mortgage has started to rise, even though the Bank of England has kept base rates at a record low." Exactly! Interest on savings comes from the opposing debt, BoE has issued QE which is mainly interest free hence the UK banks have more in deposits than they do in debts i.e. the interest paid by the debtors cannot cover the interest earned by the savers because they don't match up anymore. Going forward the BoE can tighten by increasing capital requirements, any regulation that reduces credit expansion, but they can't meaning fully increase interest rates because no way rates can rise for savers unless QE is withdrawn. So more QE for deflation, micro-management of credit availability for inflation.

Posted by stillthinking @ 01:40 AM (5751 views) Add Comment

4 Comments

1. techieman said...

ST for lots of reasons QE is a red herring in your argument.

QE gives the banks more buffer in the interbank market. I suggest the positive money videos on the subject, the bank of England's quarterly report (2014 i think) and probably best of all Steve Keens "what might happen when quantitative easing is eased".

Saturday, October 7, 2017 08:30AM Report Comment
 

2. jack c said...

I find it quite funny that there is a concern when mortgage rates rise above 1% ! having never obtained a better rate than 5.18% and at peak in the mid 1980’s endured 15%. Low rates might now be the new norm (who knows) but it surely can’t be difficult to build in a safety margin as a mortgage holder should rates and repayments begin to rise?

Saturday, October 7, 2017 09:10AM Report Comment
 

3. stillthinking said...

hi techieman, this is my reasoning. there is a brake on credit expansion by the banks. which is reserves and capital requirements. this money can be lost and comes from retained earnings (amongst external funding etc). i.e. 100 loan -> (debtor) 100+5interest balanced by (creditor)100+3(interest)+2(bank profit). The profit is a source of the capital that allows further loans. So the more profitable loans you make the more profitable loans you can make.
If as the BoE has done, you increase the capital requirement, then the banks must reduce the rate that they make additional loans.

http://www.forexlive.com/news/!/boe-pra-to-set-extra-capital-requirements-on-a-bank-by-bank-basis-20170925

This is across the board. You could consider the rate of bank credit expansion collectively by considering what their total capital reserves are, capital reserves being losable (i.e. to cover bad debts without destroying the balance). If capital requirements are up then either you pay for additional capital (which is at risk) or shrink the rate of increase of loans. You can shrink the rate of loans at an individual bank level by raising mortgage rates i.e. attempt to become the least attractive bank.
http://www.telegraph.co.uk/personal-banking/mortgages/ten-mortgage-lenders-raise-rates-within-one-week/
However as soon as one bank does this all must follow, because they can't accept loans being switched from other banks, they are all in the same situation i.e. capitally constrained. So as one moves, the others must keep their relative market share.
This is effectively tightening because it reduces credit expansion because mortgage rates are more expensive. Additionally for the banks it has the benefit of increasing their retained profits as loans come up for renewal. This is the tightening part.
QE is clearly easing, but all QE is a zero rate loan because the government retains the profits from the treasury, its just a nominal figure, the government gets all the money back. So this money doesn't have an interest bearing debt behind it, so any savings within the bank can't receive interest. So interest rates for savers are stymied until QE is reversed, but QE won't be reversed and can't be reversed. The government can't pay the increased costs.
Anyway this is my point which I suppose is just typing out the summary again. As for QE giving the banks more buffer, I don't doubt it. My suggestion is that these are the new policy levers going forward.
Anecdotally, not from 2007/8 but the crash that was allowed to happen in the late 80s, I can remember in the news at the time there were many people seeking to remortgage (but with high ltv) that were basically refused by all the banks and forced to remain on onerous terms with the issuing banks i.e. scalped to cover the capital requirements.
Anyway so a prediction would be that as mortgage rates go up, depositor rates do not.

Monday, October 9, 2017 03:59AM Report Comment
 

4. stillthinking said...

https://www.bloomberg.com/news/articles/2017-06-27/u-k-banks-brace-for-11-4-billion-pound-capital-demand-from-boe

"The BOE set the countercyclical capital buffer at 0.5 percent of risk-weighted assets for U.K. loans effective in June 2018". The current counter-cyclical buffer is zero.. Its mendacious to arbitrarily categorise these buffers.

For UK retail banks ability to fund this is Lloyds with around 17% of the market(gone down recently);
"generated pre-tax profits of £4.2bn for 2016, more than double the £1.6bn it reported for 2015 and its best result for a decade."

UK mortgage lending total across banks 245 billion outstanding
https://www.mortgagefinancegazette.com/lending-news/mortgage-lending-figures/challenger-banks-specialist-lenders-pick-mortgage-market-share-20-06-2017/

So you could argue that this move by the BoE is a fairly substantial tightening which is why the banks got all skippy with rate increases.

Monday, October 9, 2017 04:15AM Report Comment
 

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