Next interest rate move - post NR

Generali

Gorgeous_George wrote: »

I think it (credit) will be offered to less risky customers.

Most profitable are those who miss payments and take additional charges.

Less risky are those with low LTV ratios and secure jobs.

GG

It depends how you look at it.

If the credit crunch continues there are fewer funds available to lend, so what do you think is better for a bank to do if it has say £10,000,000 to lend that it is paying depositors 3% on plus the costs and aggro of running savings accounts:

-Lend to the UK govt. Guaranteed 5% with nil chance of default
-Lend secured at 5.5% to someone with 50% LTV and a job as a middle ranking civil servant
-Lend to crack addict unsecured at a rate of 2000% and a promise to break her knees if she defaults?

There isn't a right or wrong answer, just a series of decisions a bank needs to make to maximise its profits.

free4440273

I've been quite impressed with Mervyn over the last few months, I have to admit: he knows that stocks, house prices are over-valued; that inflation IS a problem; that government/public finances are an absolute mess. I just hope he practices what he preaches, and does NOT cut rates any further: The stock market can (should) live or die on its own (equities ARE over-valued by a long shot). Just my two cents

Gorgeous_George

Generali wrote: »

It depends how you look at it.

If the credit crunch continues there are fewer funds available to lend, so what do you think is better for a bank to do if it has say £10,000,000 to lend that it is paying depositors 3% on plus the costs and aggro of running savings accounts:

-Lend to the UK govt. Guaranteed 5% with nil chance of default
-Lend secured at 5.5% to someone with 50% LTV and a job as a middle ranking civil servant
-Lend to crack addict unsecured at a rate of 2000% and a promise to break her knees if she defaults?

There isn't a right or wrong answer, just a series of decisions a bank needs to make to maximise its profits.

It's not unlike how a bookmaker plies his trade. Weigh up the odds and place your bets.

The safe way to make money is secure sufficient loans a 5.5% to safeguard a few bets on the outsiders.

GG

Generali

Gorgeous_George wrote: »

It's not unlike how a bookmaker plies his trade. Weigh up the odds and place your bets.

The safe way to make money is secure sufficient loans a 5.5% to safeguard a few bets on the outsiders.

GG

And GG gets tonight's special prize for insight into how banking works!!!

If you're making a book, there are no good and bad bets as such, just good and bad bets at the price.

Whoever you lend money to, some will default. Whodda thought that Courts would go bust? Or Brazil? Or New York (nearly)? Or that nice Mr Jones from down the road?

The trick is to price your risk correctly and diversify. There's nothing wrong (from a banks point of view) to lending to almost anyone so long as you're charging sufficient interest to come out on top in the end. The problems start when, as now, you get the price of risk wrong.

Risk in loads of markets has been systematically underpriced for years. That's all starting to unwind it seems. There's a long way to go yet IMO.

firsttimetom

I just hope he practices what he preaches, and does NOT cut rates any further

Me too, but unfortunmately Mervyn is up against it as rate cuts are decided by a vote. Even if he wants to hold and everyone else votes for a cut, then its a cut i'm afraid.

Remember that elusive rate cut in 2005 that re ignited the housing market? Merv was out voted 8-1 and rates were lowered. Had he have had his way, we could be looking at a very different situation now.

I don't know much about the other voters, but they could hold substantle BTL portfolios or large numbers of shares and thus have a vested interest in lower interest rates.

My worry is that they haev in which case we are completely up against it.