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Lord Lister

Read This And You Start To Understand Why Interest Rates Are So Low

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http://uk.finance.yahoo.com/news/Banks-Accused-Of-Interest-skynews-3575619136.html?x=0

I have heard that all the big Western Banks are up to their eyes in these interest rate swaps, this article just talks about ones sold to "amatuer" investors, I understand there is trillions worth in commercial investor land. Kind of explains why the banks want (and need) interest rates to remain low. If the numbers are as I believe in the trillions, then an interest rate rise could wipe out banks very quickly. (Note, I may have completely mis understood this and am happy to be put right)

Moderator: Link corrected.

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http://uk.finance.yahoo.com/news/Banks-Accused-Of-Interest-skynews-3575619136.html?x=0

Mr Ducker told Sky: "We were selling protection against rates increasing with a lack of consideration if rates fell.

"The bank was protected more than the customer and it was normal practice to emphasise the rewards and de-emphasise the risks.

.....

"If rates go up, the bank wins. If rates go down, the bank wins. Was it ever explained to the customer in that way? No."

.....

The Financial Services Authority consider 'swaps' so complicated they should only be sold to investment professionals.

But it is claimed they were marketed to amateur investors, who did not understand the risks.

Nice.

Seems another round of miss-selling action looming if that's accurate.

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A bit about swaps

I have heard that all the big Western Banks are up to their eyes in these interest rate swaps, this article just talks about ones sold to "amatuer" investors, I understand there is trillions worth in commercial investor land. Kind of explains why the banks want (and need) interest rates to remain low. If the numbers are as I believe in the trillions, then an interest rate rise could wipe out banks very quickly. (Note, I may have completely mis understood this and am happy to be put right)

So if the BOE cannot raise interest rates, then what is left to control inflation. Are they relying on a bout of deflation followed by careful QE to manage the economy? A risky strategy methinks.

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I have heard that all the big Western Banks are up to their eyes in these interest rate swaps, this article just talks about ones sold to "amatuer" investors, I understand there is trillions worth in commercial investor land. Kind of explains why the banks want (and need) interest rates to remain low. If the numbers are as I believe in the trillions, then an interest rate rise could wipe out banks very quickly. (Note, I may have completely mis understood this and am happy to be put right)

Not really... firstly the banks will sell the swap off to counter parties. These instruments are to be used to match income against liabilities. At this stage, and for new business, banks are better off if interest rate rise as that allow them to increase the interest margin even more (e.g. pay current account 0%, lend mortgage at 6% rather than 3).

The problem of courses comes down to solvency of existing loans.

Also, from the yahoo article... I doubt the guy has anything to complain about:

Ex-Welsh rugby national Spencer John turned to property investment ....

And if he was charged a £95k fees that probably imply a swap on a loan of several million pounds at least ( say fees is 5%, so that is about £1.9 million worth of loan).

I would think people who deal with this sort of money are normally considered to be 'sophisticated'. Also, I doubt Barclays retails sell swap - it probably comes from their

Barclays Wealth (destrution) division.

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I can't be bothered to read your article, but i think you talking about a IRS (Interest Rate Swap).

The banks can either enter as the pay floating / fixed side, and receive vice versa. So it doesn't really better, am sure alot of the floating liabilities are hedged off anyway.

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I can't be bothered to read your article, but i think you talking about a IRS (Interest Rate Swap).

The banks can either enter as the pay floating / fixed side, and receive vice versa. So it doesn't really better, am sure alot of the floating liabilities are hedged off anyway.

Hedged with whom? isn't that the point, they're all up to their eyes in it, and it's leaveraged?

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Hedged with whom? isn't that the point, they're all up to their eyes in it, and it's leaveraged?

A counter party, e.g. Hedge fund, institutions, some big corporates genuinely need IRS to finance and facilitate funding.

Why don't you do a simple search on google 'How interest rate swap is used' to get some insights.

i am too lazy to explain.

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Receiveing good exposure on the sky news front page.

Not really... firstly the banks will sell the swap off to counter parties. These instruments are to be used to match income against liabilities. At this stage, and for new business, banks are better off if interest rate rise as that allow them to increase the interest margin even more (e.g. pay current account 0%, lend mortgage at 6% rather than 3).

The problem of courses comes down to solvency of existing loans.

Also, from the yahoo article... I doubt the guy has anything to complain about:

And if he was charged a £95k fees that probably imply a swap on a loan of several million pounds at least ( say fees is 5%, so that is about £1.9 million worth of loan).

I would think people who deal with this sort of money are normally considered to be 'sophisticated'. Also, I doubt Barclays retails sell swap - it probably comes from their

Barclays Wealth (destrution) division.

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http://www.globalresearch.ca/index.php?context=va&aid=18800

Interest rate derivatives, in turn, are by far the most popular type of derivative.

As Wikipedia notes:

The interest rate derivatives market is the largest derivatives market in the world. The Bank for International Settlements estimates that the notional amount outstanding in June 2009 were US$437 trillion for OTC interest rate contracts, and US$342 trillion for OTC interest rate swaps. According to the International Swaps and Derivatives Association, 80% of the world's top 500 companies as of April 2003 used interest rate derivatives to control their cashflows.

So interest rate derivatives are the world's largest market.

The largest interest rate derivatives sellers include Barclays, Deutsche Bank, Goldman and JP Morgan. While the CDS market is dominated by American banks, the interest rate derivatives market is more international.

In comparison to the almost $500 trillion in interest rate derivatives, BIS estimates that there were "only" $36 trillion in credit default swaps as of June 2009. Credit default swaps were largely responsible for bringing down Bear Stearns, AIG (and see this), WaMu and other mammoth corporations.

More at the link.

Still it all cancels out to a zero sum game.

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http://www.marketoracle.co.uk/Article11265.html

The other major threat is to the Interest Rate Swap, those powerful credit derivative contracts that tie together the bond world in complex knitting. The instability of USTreasurys on the long maturity (10-year & 30-year) and on the short maturity (so far just the 2-year) will surely unleash great firestorms of disruption, heavy losses, and raging fires for the big banks. It is next! It will be the greater second chapter to the Credit Default Swap opening salvo. Twice as many IRSwaps exist than CDSwaps, a story that bankers refuse to discuss.

A few years old but we are all still here.

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http://www.economist.com/node/752047

Aug 23rd 2001 | Tokyo |

SOMETHING curious is happening at Japan's big banks. Thanks to an accounting loophole, they are piling up large exposures to derivatives without having to disclose them to investors. Japanese banks are already weighed down by bad loans and loss-making share portfolios. Now, thanks to their enthusiasm for interest-rate swaps, they are even riskier than they already look. Fancy that.

Estimates suggest that the banks have ¥40 trillion ($330 billion) of interest-rate swaps on their books. Since they already own the same amount of government bonds, they have, in effect, quietly doubled their exposure to interest-rate fluctuations. Most of these swaps are placed off the balance sheet, so it is hard to tell exactly how much the banks own, or what proportion of it is longer-dated stuff. Still, people in the market reckon that the average maturity of banks' combined bond and swap portfolios is probably about four years. That means a rise in long-term interest rates of, say, one percentage point could wipe around ¥3.2 trillion off the banks' capital—the equivalent of a year's worth of operating profits.

Over a decade old.

Could this be another bubble about to burst in the financial system?

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A bit about swaps

I have heard that all the big Western Banks are up to their eyes in these interest rate swaps, this article just talks about ones sold to "amatuer" investors, I understand there is trillions worth in commercial investor land. Kind of explains why the banks want (and need) interest rates to remain low. If the numbers are as I believe in the trillions, then an interest rate rise could wipe out banks very quickly. (Note, I may have completely mis understood this and am happy to be put right)

That link does not work for me.

http://uk.finance.ya...619136.html?x=0

Nice.

Seems another round of miss-selling action looming if that's accurate.

So the BoE drops their bank rate, and all these people have to pay the banks MORE!!!

I don't care about the property investor, but this could actually have driven viable buisinesses underwater.

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I feel it is over the top complaint from the businessman, he should have asked more questions when entering into the agreement. I mean you don't sign anything if you don't know what will happen if one or another event occurs. It is very easy to make basic calculations and see the potential impact.

Another issue is that the journalist does not understand the principle of swaps, which are used to hedge against rise of interest rates. As businessman agreed to hedg his exposure to rise in interest rates and pay fixed rate so it's quite obvious that if interest rates fall he will need to pay more to the bank but if interest rates rise he will benefit and will get money from his bank. He basically wants to benefit when interest rates fall but minimize exposure of raise in interest rates. You can't have win-win situation but If he would have wanted to benefit from any favorable movement in interest rates, he should have used options instead of swaps.

Maybe the whole problem is to do with the lack of knowledge of the businessman or unwillingness to consult his accountant.

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I discuss the link above and a related one by hussman in several posts on my blog titled 'finding the end [i,II,II,IV].

Link?

Cut and paste?

Basic thesis?

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I feel it is over the top complaint from the businessman, he should have asked more questions when entering into the agreement. I mean you don't sign anything if you don't know what will happen if one or another event occurs. It is very easy to make basic calculations and see the potential impact.

Another issue is that the journalist does not understand the principle of swaps, which are used to hedge against rise of interest rates. As businessman agreed to hedg his exposure to rise in interest rates and pay fixed rate so it's quite obvious that if interest rates fall he will need to pay more to the bank but if interest rates rise he will benefit and will get money from his bank. He basically wants to benefit when interest rates fall but minimize exposure of raise in interest rates. You can't have win-win situation but If he would have wanted to benefit from any favorable movement in interest rates, he should have used options instead of swaps.

Maybe the whole problem is to do with the lack of knowledge of the businessman or unwillingness to consult his accountant.

This is the part I don't understand, what is he complaining about. Presumably he already had a floating rate exposure which he wished to hedge, so he does a swap with the bank to pay fixed and receive Libor (or equivalent floating rate he was exposed to).

Libor goes up, he pays more in interest but is compensated by the higher Libor rate so should, if hedged properly, be neutral - he continues to pay fixed.

Libor goes down, he pays less in interest on his original exposure and pays the difference to the bank, again should be neutral, continues to pay fixed.

If he wanted to benefit from both scenarios, you're right, he should have done a Cap at the cost of the premium.

All this presupposes to an extent a degree of sophistication on the participant, I suspect with a lot of these retail investors that just wasn't there and some banks have taken advantage as usual.

Edited by moneyscam

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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