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moneysense.ca, 9/10/08
Banks don’t match Bank of Canada’s cut
The Bank of Canada joined central banks around the world in cutting interest rates by 50 basis points. The Federal Reserve, European Central Bank, Bank of England and central banks in Switzerland and Sweden joined in the move. The Reserve Bank of Australia had cut rates by 1 percent just the previous day.
The major Canadian Banks, which have been grumbling about the increased cost of borrowing for months, finally decided to not match the Bank of Canada and decreased the interest on the prime rate by 25 basis points. The prime rate to which variable-rate mortgages and secured lines of credit are tied to now stands at 4.5%.
It used to be a matter of routine that banks charged interest rate at prime for secured lines of credit and typically offered a discount on the prime rate for variable-rate mortgages. TD Bank has announced that it will start charging prime plus one percent on lines of credit and variable-rate mortgages. While it is very disappointing to see that the banks are increasing borrowing costs, they are behaving just like any other business — when their costs go up, they find a way to pass it on to consumers.
moneysense.ca, 9/10/08
So it seems like canadian banks also have liquidity issues. Although they are not as publicized as their fellow US counterparts..
It isn’t about liquidity, they don’t seem to be changing credit limits like the US banks are, it is about the cost they have to pay to get the cash to lend out (at least that is what they are claiming). They apparently have been allowing their lending margins to get squeezed and they don’t want to do that anymore. I find it a little disappointing as a consumer I’m not seeing the full 0.5% rate cut but as a shareholder of 4 of the Canadian banks I think I’d rather see that then see compressed margins in their earnings reports.
What exactly is the basis of the BoC setting the rates. Does the BoC facilitate interbank lending by being a counterparty, or do they provide injection financing at the rate that they set (ie, banks could borrow from the BoC at that rate?)
The reason I ask is that if the BoC basically says “make it so” without doing anything to actually facilitate it, such as depositing money into the banks to be lent out, then it is no wonder that the banks have given up trying to keep up with their cuts, but if instead the BoC has now lowered the banks’ costs by 0.5% and the banks are only passing on 0.25% of the savings, I’d rather the BoC just up it by 0.25% again instead of letting the banks cash in.
I’m seeing the banks move as a response to supply and demand. Their is lots of demand out there for loans but not much supply, so why not charge more? If interest rates were priced by the market, you can be they’d be going up regardless of what the CBs want.
Steve, here is some information on the BoC rate: http://www.bankofcanada.ca/en/monetary/target.html
It seems like it is the rate that banks charge when lending to themselves. The part that I don’t quite get is that the BoC sets a ‘target’ so it seems that they don’t just say make it so but they do something else to make sure the borrowing happens at or near the target rate. Digging just a little deeper I found this: http://www.bankofcanada.ca/en/backgrounders/bg-p9.html .
So the BoC does’t just say ‘make it so’ it will actually lend money to banks at the target + 0.25% and it will pay interest on deposits at the target – 0.25%.
Steve: Here’s some good material on the Fed. The BoC does the same thing here.
http://www.federalreserve.gov/generalinfo/faq/faqmpo.htm
Thanx, oxCC… so basically the BoC has reduced the costs to banks by 0.5%, but they are only passing along 0.25%… I’ll be watching what they do to the high interest savings account rates, and if they drop those 0.5% instead of 0.25%, we’ll know they’re profiteering.
The worst part is this isn’t exactly just supply and demand… changing the spread on new loans is suppy and demand, changing how prime rate is calculated affects existing variable rate mortgage holders who have no alternatives but to take it for now.
Ah well, the bank that has my mortgage won’t be getting any more of my RRSP money as payback.
Are Canadian banks really competitive, or are they a cartel? They kind of just wait for someone to make a move, then they all do the same thing.
The alternative would be to open the banking sector to more foreign competition, but that’s no magic bullet either. Look at the mess the US banking sector is in.
I have a variable-rate mortgage, so I’m not impressed with my bank today, but I’m not surprised either. I’m curious to see if the gap between the Bank of Canada’s overnight rate and the bank’s prime rate stays at it’s new width. I would assume so, unless it gets even wider.
Sellers are in fantasy land with asking prices now.
Eat your varible rate mortages. We now see banks will need to squeeze your ass to cover the back door book loss. Rates will continue to go up up up. Look for more service charges coming soon.
What’s that? Bond spreads in the crapper too? Pimco starting to cry and isn’t part of the inner circle. Time to lock in for 10+ people.
Gene,
If you are disappointed, I am angry. We have an Manulife One acount and they are not even dropping a .25% to 4.5%. The variable rate with them remains at 4.75%.
Does anyone know of a bank that is offering a good variable product?
>I’d rather the BoC just up it by 0.25% again instead
>of letting the banks cash in.
“Letting the banks cash in” is exactly one of the reasons we are doing this (especially in Europe and the USA). We are trying (desperately) to recapitalize the banks by any and all means.
Let’s bitch at the banks when this thing is over. For now, let’s not cut off out nose to spite our face.
Bob,
Sorry to hear (and surprised) that Manulife didn’t drop their rate in line with the big banks. I liked the idea of Manulife One, but when I was looking for a mortgage, I found a prime – .75% deal at RBC. I was happily surprised to renew at that rate a little over a year ago. From what I hear, comparable variable rate mortgages are no longer available.
Here’s some rates from financialpost.com
http://www.financialpost.com/money/rates/mortgage-open.html
Seems like the variable rates are right around prime, which is probably why Manulife felt safe in not cutting their rate. Manulife One has a lot of flexibility, so I feel it is worth a little more than a standard variable rate mortgage.
The squeaky wheel gets the grease.
We called and emailed Manulife Bank saying that we were outraged that they were making a cash grab. I am sure that many Manulife One customers did the same thing, because I checked their rate and they have at least matched the major banks with a .25% cut. I still think we all shoul have got the full .50% cut.
We are all in this together and need all the help we can get.
I’d say it is more likely that you are just too impatient. It takes a while for the bureaucracy at some banks to get their rate dropped. I know for savings account rates, it takes some time before they reflect any changes.
gene: The Canadian banks are an oligopoly. I wouldn’t say they are a cartel or colluding with each other but cut-throat competition is certainly lacking. It’s certainly better to own these banks than be their customers.
Bob: It’s great that Manulife matched the other banks with a quarter point cut. I’m not happy that the banks didn’t match the BoC cut but I’m not surprised either. These banks are behaving like any business — when their borrowing costs go up they pass it on to us.
Xenko,
Believe me the minute there is a rate up by the central bank, Manulife has it changed on the website in 24 hours. The last serveral rate cuts the website and HELOC was updated in 24 hours as well.
It has nothing to do with being impatient. They were trying to make a cash grab.
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The banks do not need to follow the Bank of Canada. The banks also should also think of the consumers interest and should not pass any extra cost to them.
John
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Scotia, BMO and RBC have now cut their rates by a further 25bps. Others by 15bps. Shame on Manu for playing around. I have a vrm and when I opted for it rather than fixed, I knew I was taking some risk. I should get the reward for my risk when the overnight rate drops just as I will get hit when it rises.
IMO the banks should follow the overnight rate when setting prime and if they need to recap, they should be adding points to vrm’s going forward, not messing with existing loans. How are borrowers to make any decisions when the information they have at the time of borrowing is not necessarily as it appears?
The Bank cut was not meant to help consumers or to invite them to buy more (even though it’s a direct impact of an interest cut).
They actually want to improve the liquidity in the market and enable banks to be able to get their day-to-day financing.
On the other hand, because Cdn banks do have to fight for capital, for the first time in years I was able to actually negotiate with charter bank staff for a better rate on rollover of a GIC, by comparison with ING and my main RRSP GIC holder Cambrian. I used to do it all the time, but have been stonewalled since the 1990, with a charter bank “take or leave it” policy about posted rates. Anybody with five digits to lock into a GIC in these perilous times should be shopping rates and playing hard-to-get.
Check your variable rate mortgage agreement wording. Mine says “This will change with OUR Mortgage Prime Rate”. That means instead of dropping 3/4% I expect mine will increase the 1% that my bank has raised THEIR mortgage prime rate. I bet all the banks have the same wording in their agreements because i checked a few of their websites and they all use that wording with their posted rates.