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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659 posts

Ultimate Geek
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#3028042 27-Jan-2023 21:58

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.

Yes and no. I too get annoyed when people think this.

However the bank's net interest margin has been increasing:

https://bankdashboard.rbnz.govt.nz/profitability

Take ANZ:

Sept 22 = 2.3%

June 22 = 2.2%

March 22 = 2.1%

Dec 21 = 2.0%

Sep 21 = 2.0%

Over the past year the NIM has increased by 15% from 2.0% to 2.3% for ANZ

Now that's not to say that the banks are charging more from you and me with our mortgages - the increased NIM is largely due to lazy funds - money sitting in accounts earning zero or very low interest rates. When lending rates were 2%, those funds were earning the banks 2%. Now floating rates are 7.99%, those lazy funds are earning the banks 7.99%.

So when interest rates rise, banks do make more money but not in the way you think.

cddt

1967 posts

Uber Geek
+1 received by user: 1904

#3028338 28-Jan-2023 15:26

Eitsop:

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

I have to disagree on the KS suggestion. It would reduce spending by the poor too much (even more hardship for them) and for the rich by not enough (unnoticeable). For example, you increase KS contributions by 2 percentage points, most fairly well off people won't notice the difference in their income, and of course the truly rich don't earn salaries or contribute to KS at all. At the bottom though that 2% is the difference between children eating breakfast or not.

Better suggestions for reducing aggregate demand in the economy without smashing the already destitute would include (no particular order):

* means-testing the superannuation benefit

* implement a land tax and/or asset tax

* increasing income tax rates for higher brackets

GV27

5977 posts

Uber Geek
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#3029904 31-Jan-2023 11:08

cddt:

Better suggestions for reducing aggregate demand in the economy without smashing the already destitute would include (no particular order):

* means-testing the superannuation benefit

I haven't heard a good argument for means-testing Super. It doesn't address the cash-poor, asset-rich issue many elderly people find themselves in (but can't break out of without selling a house and leaving a community, possibly along with medical providers and family connections), and there's still the awkward chat about why people who have saved all their working lives should suddenly miss out. You're removing a powerful incentive to stabilise your own finances by means-testing super in that regards, given many will live up to 30 years after they actually retire.

For this to be an effective demand-reduction tool, it has to apply immediately but retirement changes like this should be signalled years, if not decades in advance so people can plan. Hell, I'd say anyone in their 30s is rapidly running out of runway for retirement savings/investments given what modern houses and mortgages cost at the moment, and how many people that age will still have a mortgage come gold-watch time.

Frankly the first change we make to anything to do with retirement is taxing Kiwisaver on exit instead of taxing the income generated year-on-year. After that we can talk about the other stuff, but this needs to happen first.

acetone

204 posts

Master Geek
+1 received by user: 57

#3030211 1-Feb-2023 10:04

I am surprised that no one has raised the fact that they had such a large loan and not split it up into different fixed time frames.
This is a perfect example of why doing so is a good idea.

Dratsab

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#3030219 1-Feb-2023 10:40

acetone: I am surprised that no one has raised the fact that they had such a large loan and not split it up into different fixed time frames.
This is a perfect example of why doing so is a good idea.

It was raised on the first page by @cddt...

acetone

204 posts

Master Geek
+1 received by user: 57

#3030225 1-Feb-2023 10:50

Dratsab:

acetone: I am surprised that no one has raised the fact that they had such a large loan and not split it up into different fixed time frames.
This is a perfect example of why doing so is a good idea.

It was raised on the first page by @cddt...

Totally missed that, my bad. Good to see it raised as lots of people don't seem to know that you can split your loan up.

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Dratsab

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#3030346 1-Feb-2023 13:01

Yeah, mine's split into four parts. One is coming up for renewal mid July which'll hurt a little bit but had only been fixed for one year so it won't be a massive rise. Another comes up for renewal mid July next year. That one'll be a real leap as I'd fixed it for three years at a fairly low rate. That said, my auto payments pay quite a reasonable amount over my minimum requirements so my actual payments will stay the same. All that'll happen is that I'll pay more in interest and less in principal.

mattwnz

20515 posts

Uber Geek
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#3030400 1-Feb-2023 14:42

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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?

It all depends on the rate offered, but overseas people were taking out 30 year mortgages due to the rates being attractive. 5 years is not a very long term. If it was 30 years at 3% I suspect many would have taken it out for that certainty, and historically it being very low.

mattwnz

20515 posts

Uber Geek
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#3030422 1-Feb-2023 15:18

GV27:

cddt:

Better suggestions for reducing aggregate demand in the economy without smashing the already destitute would include (no particular order):

* means-testing the superannuation benefit

I haven't heard a good argument for means-testing Super. It doesn't address the cash-poor, asset-rich issue many elderly people find themselves in (but can't break out of without selling a house and leaving a community, possibly along with medical providers and family connections), and there's still the awkward chat about why people who have saved all their working lives should suddenly miss out. You're removing a powerful incentive to stabilise your own finances by means-testing super in that regards, given many will live up to 30 years after they actually retire.

For this to be an effective demand-reduction tool, it has to apply immediately but retirement changes like this should be signalled years, if not decades in advance so people can plan. Hell, I'd say anyone in their 30s is rapidly running out of runway for retirement savings/investments given what modern houses and mortgages cost at the moment, and how many people that age will still have a mortgage come gold-watch time.

Frankly the first change we make to anything to do with retirement is taxing Kiwisaver on exit instead of taxing the income generated year-on-year. After that we can talk about the other stuff, but this needs to happen first.

IMO NZ can afford Super if the economy was growing and performing well and everyone was paying their fair share of tax. National are planning on raising super back up to 67, which is a policy their brought in in their last term. Labour scrapped this. Now National are planning on brining it in without adjusting the dates on the old policy, giving people in their late 40's who will be the first affected, 10 years less to plan. This was from a party under Key that said Super was affordable without raising the age.

I did notice a TV ad recently fronted by the old fair go host about donating your super to some organistion. That shows that there are some who don't need it due to their wealth. It is the first time I have seen that and is a sign that there are people who are getting it and don't need it.

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