Banks offering mortgages below the rate of savings interest they pay.

[crazypabs]

Northern rocks business model was to lend money as cheaply as possible to as many people as possible but make money from the fees charged.

We remember how that worked out!

[Fishfinger]

21 hours ago, scottbeard said:

Do people still no5 understand banking?

Banks don't lend out money they get as deposits.

Banks click a button and magic money into existence to lend out.  They just keep the deposits as capital.

So they might pay 6% on £1 million of deposits but use that to back £20 million of loans at 5%

So in that case take a mortgage out, default on it and ask the bank to prove it's loss. They wont be able to because it's conjured out of thin air?

[TenYearToGetMyMoneyBack]

4 minutes ago, Fishfinger said:

So in that case take a mortgage out, default on it and ask the bank to prove it's loss. They wont be able to because it's conjured out of thin air?

It will be a loss on their balance sheet. That could start a Bank Run and it is the Bank that disappears into thin air 🙂

[PropertyMania]

11 hours ago, winkie said:

Mortgage five years.......ISA one year.

the most sensible answer here

[PropertyMania]

11 hours ago, winkie said:

Mortgage five years.......ISA one year.

the most sensible answer here

[Tony_Teacake]

11 hours ago, winkie said:

Mortgage five years.......ISA one year.

Well spotted.

[cdd]

18 minutes ago, PropertyMania said:

the most sensible answer here

You can also get above 5% ISA fix for 5 years with various banks. I think it is expected that rates will be at this level for a long time.

Edited October 19, 2023 by cdd

[scottbeard]

2 hours ago, Fishfinger said:

So in that case take a mortgage out, default on it and ask the bank to prove it's loss. They wont be able to because it's conjured out of thin air?

Your mortgage is a contract that you have signed up to as an over 18 in sound mind.

The contract says you pay or they take your house.

If you default they will take your house.

They don't need to 'prove loss'

[Fishfinger]

18 hours ago, scottbeard said:

Your mortgage is a contract that you have signed up to as an over 18 in sound mind.

The contract says you pay or they take your house.

If you default they will take your house.

They don't need to 'prove loss'

They do when you put your defence in asking them to prove their financial loss.

Show me on the bank side of the ledger that they transferred the money to you and therefore have made a loss. They can't as the money was conjured out of thin air..

 

 

[scottbeard]

36 minutes ago, Fishfinger said:

They do when you put your defence in asking them to prove their financial loss.

Show me on the bank side of the ledger that they transferred the money to you and therefore have made a loss. They can't as the money was conjured out of thin air..

 

Good luck with that argument in court,  I guess you have armfuls of case law where that defence worked....? 🙄

[longgone]

Surely the financial loss is the opportunity cost of not receiving the monthly payments. 

[Aidan Ap Word]

On 19/10/2023 at 10:55, Si1 said:

Ok I'd love to see a non-BoE source that explained this

(Context - I just don't believe what the BoE come out with a lot of the time because I think they deliberately obfuscate in order to protect their privilege. I don't believe their junior stuffers actually understand it themselves, I think they're recruited for their compliance rather than knowledge)

Fractional Reserve banking is straight from the 1990s neoclassical economics textbooks (which are more like the propaganda and hymn sheets for the accountant worker drones pumped out by universities of the time). The "multiplier effect" was their attempt at mathematics smoke and mirrors to demonstrate that fiat money is actually limited by method.

Turns out the only limits on fiat money are people's imagination and political power (or lack there of) to manage (up or down) the insane rates at which it is created.

Otherwise how do you explain the US national debt?

That is: I used to believe that the deposits set the foundation for loans (within the limits of the "fractional reserve required").

But the BoE link is good and clear and simple at disavowing anyone of this. Because not only does it succinctly described ex nihilio, but it also says:

Quote

Regulation limits how much money banks can create. For example, they have to hold a certain amount of financial resources, called capital, in case people default on their loans. These limits have become stricter since the financial crisis.

And, what exactly can those financial resources be? Well, these change over time (meaning many years) but one thing is categorically true: they are not limited to customer deposits.

And - very subtly - "financial resources" and "capital" are only mentioned within a "For example" - meaning the rabbit hole of what the regulations allow them to do is deep and wide and labyrinthine.

If you do follow the links down the rabbit hole to find out what BoE defines as "financial resources" the web site gets more and more vague with every click.

Edited October 20, 2023 by Aidan Ap Word

[scottbeard]

7 minutes ago, longgone said:

Surely the financial loss is the opportunity cost of not receiving the monthly payments. 

Exactly.  You have a contract where you promise 25 years of mortgage payments or a house if you default.  If you default you have to give the house. Its simple and fishfinger is just off on one here.

[longgone]

6 minutes ago, scottbeard said:

Exactly.  You have a contract where you promise 25 years of mortgage payments or a house if you default.  If you default you have to give the house. Its simple and fishfinger is just off on one here.

Fishfinger must work for royal mail.

Sell a £100 item on ebay that you paid £10 for and royal mail will only pay you £10, they only payout on what the seller paid not the buyer on loss.

Losing £90 has no bearing it would seem on fishfinger or RM

 

[Chunketh]

On 18/10/2023 at 22:24, cdd said:

It's in the news that Virgin is offering a 5 year mortgage fix at around 4.7%

Meanwhile they pay 5.85% on an ISA to savers.

Essentially this means they are paying me a return of nearly 6%, only to then lend that money to debtors for less than 5%.

It doesn't seem to be a profitable business model?

no it means they believe interest rates will fall below 4.7% in short order. Locking in the profit for x years.

[cdd]

17 hours ago, Chunketh said:

no it means they believe interest rates will fall below 4.7% in short order. Locking in the profit for x years.

"We believe interest rates are going to fall below 4.7% in short order. Let's also give savers 5-6% fix on their cash savings for 2-5 years". Doesn't add up.

[DarkHorseWaits-NoMore]

Headline grabbing, loss leader teaser rates.

[Si1]

On 19/10/2023 at 10:55, Si1 said:

Ok I'd love to see a non-BoE source that explained this

(Context - I just don't believe what the BoE come out with a lot of the time because I think they deliberately obfuscate in order to protect their privilege. I don't believe their junior stuffers actually understand it themselves, I think they're recruited for their compliance rather than knowledge)

Not sure I've had a response to this? I'd argue that's because the BoE pop website spiel just reflects the direct accounting expression of mortgage issuance and doesn't get so far as the point the deposit side of the balance sheet goes to another bank, at which point the mortgage bank has an asset needing to be balanced against a different liability and hey presto Fractional Reserve Banking is laid bare in all its actually quite straightforward inoffensive simplicity. So it's just the same as the cartoon images I posted .

Edited October 21, 2023 by Si1

[Aidan Ap Word]

4 hours ago, Si1 said:

Not sure I've had a response to this? I'd argue that's because the BoE pop website spiel just reflects the direct accounting expression of mortgage issuance and doesn't get so far as the point the deposit side of the balance sheet goes to another bank, at which point the mortgage bank has an asset needing to be balanced against a different liability and hey presto Fractional Reserve Banking is laid bare in all its actually quite straightforward inoffensive simplicity. So it's just the same as the cartoon images I posted .

Fractional reserve banking would be the key thing to be discussing if the fractional reserve rate was the only constraint on retail banks' lending activity.

But if it was only the desposit requirements setting the lid on the lending opportunities for banks then they - led by the BoE (the authority that issues their banking license) - would say so.

If you wish to posit that fractional reserve is the key the metric against which lending decisions are made then please provide your own evidence of this.

And if fractional reserves were in place for Northern Rock it would never have failed (that is: they would have survived the run on them). The fact that Northern Rock was widely exposed to MBS (the "capital" they were claiming was to support their lending activity <- this is things thatare not customer deposits) highlights that the deposits they held with customers was (at best) only a small part of their safety net.

[Aidan Ap Word]

4 hours ago, Si1 said:

On 19/10/2023 at 10:55, Si1 said:

Ok I'd love to see a non-BoE source that explained this

(Context - I just don't believe what the BoE come out with a lot of the time because I think they deliberately obfuscate in order to protect their privilege. I don't believe their junior stuffers actually understand it themselves, I think they're recruited for their compliance rather than knowledge)

Not sure I've had a response to this?

It's true that the junior staffers don't understand. And a very big part of the staffers of the other financial institutions don't understand. If they did it would all fall apart very very quickly.

BUT - the BoE is the issuer of banking licenses in the UK. In terms of being the lead authority - in the UK at least - on all matters financial then there is no "higher" authority to quote from.

[cdd]

https://theconversation.com/why-central-banks-are-too-powerful-and-have-created-our-inflation-crisis-by-the-banking-expert-who-pioneered-quantitative-easing-201158

 

I found this in depth write up earlier, about how central banks caused inflation and through QE caused a real estate price explosion.

It is said that QE, if used wisely, to invest in business, could have been positive. The problem is that most of it was used by banks for real estate lending.

It mentioned in this thread that banks create money out of thin air to lend for mortgages. This leaves me confused as to how QE played its role in inflating real estate prices.

[scottbeard]

9 hours ago, cdd said:

"We believe interest rates are going to fall below 4.7% in short order. Let's also give savers 5-6% fix on their cash savings for 2-5 years". Doesn't add up.

People have already explained the situation to you loads of times so I fear I’m wasting my time here but let’s have one more go: due to fractional reserve banking banks have a lot more loans than savings.  Ever noticed the way you have 10k in your ISA but your mortgage is £200k?  Yes most people are like that which is why income of 4.7% x 200 > 5.5% x 10 and that’s why bankers are rich.

[Aidan Ap Word]

2 minutes ago, scottbeard said:

 Ever noticed the way you have 10k in your ISA but your mortgage is £200k?

But not everyone is a mortgage holder.

[Aidan Ap Word]

16 minutes ago, scottbeard said:

Yes most people are [net debtors/mortgage holders] which is why income of 4.7% x 200 > 5.5% x 10 and that’s why bankers are rich.

No, "most people" are not net debt holders ... but it is true that bankers make most of their money on interest on loans that are money issued ex nihilo.

Which is why they run price wars when people stop borrowing and have even bigger margins when the demand for mortgages is high.

The base rate (and LIBOR ... or is that "Lie-BoR" (I forget)) and probably many other markets for "capital" are all used for the plate-spinning and shady-opaque-balance-sheet-ism ... somewhere in all that murk is the cost of capital to the banks which sets the ceiling for how much mortgage debt they can issue.

Probably not best to use an over-simplified micro-economics-based view on any of this sh1t.

Edited October 21, 2023 by Aidan Ap Word

[Flat Bear]

On 19/10/2023 at 20:49, Fishfinger said:

So in that case take a mortgage out, default on it and ask the bank to prove it's loss. They wont be able to because it's conjured out of thin air?

I take it you are just trying to be silly?

The simple money multiplier "myth" is being explored now throughout the financial sector. Countries such as UK, Canada, Australia have a zero reserve requirement!! So in that sense money creation is limitless.

The debt obligation (mortgage) once created is real. Any default on a percentage of this obligation IS REAL. You know this don't you?

There are of course other restraints such as liquidity and capital reserve requirements on banks which can become a serious problem when demand for debt obligations falls, such as now. Banks need fresh blood to keep the plates spining.