Failure of banks doing stress tests

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Forums › Finance and wealth management › Failure of banks doing stress tests

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#3027644 26-Jan-2023 18:37

Eitsop:

eg if I wanted a $1m mortgage, and current rate was 2.9% and stress level was 6.9%

the 2.9% level would be $4163/month
the 6.9% level would be $6586/month

But interest rates are over 7% now and could rise further, so I have to wonder why 6.9 was the stress test amount, when that even sounds low.

A bank stress test of 6.9 maybe ok if people could lock in the low rate for 30 years (the length of the mortgage), like you can in the USA and some other countries. But in NZ I understand the longest you can now lock in the interest rates is just 5 years. So any borrower is taking on quite a lot of risk of rates rising in the future..

tweake

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#3027653 26-Jan-2023 19:09

mattwnz:

A lot of those stories were driving FOMO. Eg if you don't buy now you will never get into the market. Yet prices have now fallen a lot in many places.

I remember the quote that NZs economy is a housing market with little bits tacked on. So we have the idea that over the long term house prices always go up in price. So people expect to always sell a house for more than they purchased it do. Although there are many houses that are currently selling for less than they were purchased for in 2020/21

don't forget whats also been pushing things is rent. many people justified the high house price by the fact that they where having to pay high rent, mortgage was cheaper. then you had people buying high priced homes and renting them out at high prices. golden rule of business, charge what the market can bare.

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#3027718 27-Jan-2023 07:21

mattwnz:

A lot of those stories were driving FOMO. Eg if you don't buy now you will never get into the market. Yet prices have now fallen a lot in many places.

I remember the quote that NZs economy is a housing market with little bits tacked on. So we have the idea that over the long term house prices always go up in price. So people expect to always sell a house for more than they purchased it do. Although there are many houses that are currently selling for less than they were purchased for in 2020/21

banks are like your candy store - they are out there to make money, by encouraging you to outbid the other guy across the room, and in another store, encouraging that guy across the room to outbid you

when the reserve bank printed 71B dollars, dropped interest rates to nothing while guaranteeing banks' loan, there was the problem. suddenly the RB stops printing money, raises the interest rates 5 fold, and cut off bank loan guarantees all in one go. the only question i have is - who made them do the first three and the second three things? someone must have told them to do these things ...

i don't know why we're blaming the banks

GV27

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#3027721 27-Jan-2023 07:50

mattwnz:

There was also talk of interest rates going negative.

Not just 'talk', the banks were being publicly told to prepare for it by RBNZ.

If you'd listened to what the PM, Finance Minister and RBNZ Governor had said up until that point and taken that on board as part of your decision-making in a bid to make the most informed choice possible, you got shafted.

jonherries

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#3027727 27-Jan-2023 08:23

Interesting talk on breakfast this morning by Bernard Hickey. He thinks the number of people in peril with interest rates is only in the hundreds. Says it will be painful for many more but they will survive.

Jon

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#3027748 27-Jan-2023 09:20

jonherries: Interesting talk on breakfast this morning by Bernard Hickey. He thinks the number of people in peril with interest rates is only in the hundreds. Says it will be painful for many more but they will survive.

Jon

Interesting as some of the data has 45% of the total book rolling off fixed mortgages this year. I have had 2 roll off from 2.5 to 6.39 it’s a big increase.Rates will be a killer as well our rates are been Calculated on the June 2022 value out house has dropped 200k since then but will be rated near the peak . I’m not looking forward to the new rates,

Handsomedan

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#3027753 27-Jan-2023 09:33

I get annoyed with this kind of quote, "The most disconcerting thing is that [rising interest rates] is all going to make the banks richer,"

Makes my blood boil. Why are rates going up? It's not an arbitrary decision by the banks. They borrow that money and they pay higher rates for that borrowing (either through borrowing from international money markets or paying higher interest on deposits).

The profit margin DOES NOT GO UP!

On a marginal basis, the banks make a lot of money, but a smaller percentage of profit than many other similarly sized businesses.

The home owners are as much to blame in this as the bank are - not only should the bank have probably not lent to these people in the first place (based on the info on the article, which is minimal), but the borrowers should have not gone so big with their first home purchase and mortgage.

I have little sympathy.

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Handsomedan

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#3027754 27-Jan-2023 09:34

GV27:

mattwnz:

There was also talk of interest rates going negative.

Not just 'talk', the banks were being publicly told to prepare for it by RBNZ.

If you'd listened to what the PM, Finance Minister and RBNZ Governor had said up until that point and taken that on board as part of your decision-making in a bid to make the most informed choice possible, you got shafted.

We were prepping for that - I am a banker. It was unprecedented (or at least that was our understanding).

Would have been a really weird time for all.

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GV27

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#3027758 27-Jan-2023 09:44

Handsomedan:

I get annoyed with this kind of quote, "The most disconcerting thing is that [rising interest rates] is all going to make the banks richer,"

Makes my blood boil. Why are rates going up? It's not an arbitrary decision by the banks. They borrow that money and they pay higher rates for that borrowing (either through borrowing from international money markets or paying higher interest on deposits).

The profit margin DOES NOT GO UP!

On a marginal basis, the banks make a lot of money, but a smaller percentage of profit than many other similarly sized businesses.

The home owners are as much to blame in this as the bank are - not only should the bank have probably not lent to these people in the first place (based on the info on the article, which is minimal), but the borrowers should have not gone so big with their first home purchase and mortgage.

I have little sympathy.

I mean anyone can look up the 2 - 10 year swaps and see what they're trading at and when they are rocketing up, but you have to know what they are to know what to look for.

I genuinely think it's unfair to hold customers to the same expectations as banks when it comes to what people are stress-tested at and whether what that says you can afford is reasonable, given that customers are just people and banks are multi-billion dollar financial institutions - and even then, if stress tests weren't sufficient then that's a financial stability/RBNZ issue and they should have been issuing guidance and doing so publicly.

None of this would have mattered if we hadn't chosen to pump billions of dollars into an economy already obsessed with housing and with little else to spend it on, or actually addressed the reasons this was so appealing in the three years or more pre-Covid since it was publicly accepted that housing was already in dire need of real intervention.

cshwone

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#3027766 27-Jan-2023 09:59

Stu1:
jonherries: Interesting talk on breakfast this morning by Bernard Hickey. He thinks the number of people in peril with interest rates is only in the hundreds. Says it will be painful for many more but they will survive.

Jon

Interesting as some of the data has 45% of the total book rolling off fixed mortgages this year. I have had 2 roll off from 2.5 to 6.39 it’s a big increase.Rates will be a killer as well our rates are been Calculated on the June 2022 value out house has dropped 200k since then but will be rated near the peak . I’m not looking forward to the new rates,

This is one of the biggest misconceptions. Your rates bill will not be impacted except by the increase in your council's annual budget (which is why rates go up). Rates are not calculated on the absolute or notional value of your property as a standalone. Rates are calculated on the basis of the value of your house as a proportion of the value of the overall housing stock in the council area. So if all the prices have dropped/gone up the proportion of your value to the overall value stays the same.

cddt

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#3027856 27-Jan-2023 13:27

Batman:

i don't know why we're blaming the banks

There is one bank to blame... but you can't get a mortgage from them.

eracode

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#3027901 27-Jan-2023 14:56

Stu1 Quote: “… our rates are been Calculated on the June 2022 value out house has dropped 200k … “

Sounds like a pretty expensive long-drop out house. 😀

Sometimes I just sit and think. Other times I just sit.

Eitsop

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#3028022 27-Jan-2023 21:03

cddt: There is one bank to blame... but you can't get a mortgage from them.

The cash rate tool they have certainly isn't fit for purpose

takes far too long for it to be felt
only impacts people with mortgages
disproportionally impacts first home buyers

Like Labour Party once proposed (when they weren't in govt), a better tool would be to give RBNZ ability to increase/decrease KiwiSaver rates. https://www.rnz.co.nz/news/political/242861/labour-makes-monetary-policy-change

impact nearly immediately
impacts all wage earners
impacts all people equally

Plus instead of interesting going to banks, they money goes to your long term savings

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#3028037 27-Jan-2023 21:46

mattwnz:

Eitsop:

eg if I wanted a $1m mortgage, and current rate was 2.9% and stress level was 6.9%

the 2.9% level would be $4163/month
the 6.9% level would be $6586/month

But interest rates are over 7% now and could rise further, so I have to wonder why 6.9 was the stress test amount, when that even sounds low.

A bank stress test of 6.9 maybe ok if people could lock in the low rate for 30 years (the length of the mortgage), like you can in the USA and some other countries. But in NZ I understand the longest you can now lock in the interest rates is just 5 years. So any borrower is taking on quite a lot of risk of rates rising in the future..

People bring up the 30 year fixed rate term as if it is a magical solution. The fact is that when 5 year rates were 2.99% very few people taking this term and were still fixing for 1 year at 2.19%. What makes you think they would take 5.99% for 30 years if they wouldn't even fix for 5?

Handle9

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#3028039 27-Jan-2023 21:49

logo:

mattwnz:

But interest rates are over 7% now and could rise further, so I have to wonder why 6.9 was the stress test amount, when that even sounds low.

A bank stress test of 6.9 maybe ok if people could lock in the low rate for 30 years (the length of the mortgage), like you can in the USA and some other countries. But in NZ I understand the longest you can now lock in the interest rates is just 5 years. So any borrower is taking on quite a lot of risk of rates rising in the future..

People bring up the 30 year fixed rate term as if it is a magical solution. The fact is that when 5 year rates were 2.99% very few people taking this term and were still fixing for 1 year at 2.19%. What makes you think they would take 5.99% for 30 years if they wouldn't even fix for 5?

Historically this has been the problem. People underestimate the risks and over estimate their ability to pay.

Both my mortgages are five year terms at 2.99%. It was far too good to turn down for either of them.

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