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And this wins thread of the day.

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Posted (edited)
23 hours ago, mattwayne_c said:

PART 1: Let me start this post by telling you a conversation I had with my mother, an executive loan officer and branch manager of a regional bank in the south:

After the usual mother/son conversation, I asked her how her job was going since she just came back from family leave. APPARENTLY....

"The top executives are freaking out. The projections for loan income are completely off due to the FED announcement."

If you're not in the US, basically the central bank wants to lower interest rates next month. The effect? Here is an excerpt from a Yahoo Finance article:

https://finance.yahoo.com/news/fed-interest-rate-cut-horizon-121512567.html

So, US banks will be struggling to make the quota for this fiscal half because the banks projected the rate to actually increase rather than decline. This meant that many banks gave adjustable rate loans to borrowers in hopes that the prime rate would increase over time. 

Think about what you are saying here. If a bank borrows at the overnight rate for reserves (2%) and lends at the 30 year rate plus a Mark-Up (2.5% + 2%), then the rate of return on loans for a bank is 4.5% - 2% = 2.5%

If the fed reduces the overnight rate to zero, then the rate of return for a bank loan is 4.5% - 0% = 4.5%

4.5% > 2.5%

That is, when the Fed reduces its interest rate corridor banks' costs go down. This fits the data, because we see contractions occur after the Fed raises its overnight rate. If the banks benefited by an increase in the overnight rate, then we would see an increasing supply of loans as rates increased, and economic booms would coincide with Fed rate rises--but we see the exact opposite of this in the data, loans contract when the yield curve inverts because its less profitable to create loans, thus the money supply contracts, and the supply of funds for meeting payment obligations decreases, leading to defaults and an economic contraction.

 

Quote

PART 2: Responses from other banks have ranged from nonchalant to panic

As you can imagine, banks want to keep a lid on their panic state. Most have released statements that say they were prepared for the rate decline. Some are in denial and think the FED will call back on its majority vote to cut the rate

https://www.cnbc.com/2019/06/20/one-major-bank-is-holding-the-line-saying-the-fed-wont-cut-rates-this-year.html

Once Goldman Sachs executive went all the way to say smaller banks are screwed 

https://www.bloomberg.com/news/articles/2019-06-20/goldman-sachs-executive-says-legacy-retail-banks-are-screwed

Based of the conversation with my mother, I would agree that the banks are concerned and stand to lose a lot of money. 

We can all ignore your mother, as what she is saying is the opposite of what is occurring. The banks stand to make even more money

 

Edited by Wandering_Dog

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Guest

Great thread, i'm in it for the drama

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Posted (edited)

Good humor here. If predicting cash flow was that simple we would be rich trading forex markets.  Hint: what you think will move the dollar, yen, euro, or whatever cyrpto up or down due to fed, bank or other action is a 50/50 guess most of the time at best.  Try it and see for yourself.  

Edited by JeffXRP

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9 hours ago, Wandering_Dog said:

Think about what you are saying here. If a bank borrows at the overnight rate for reserves (2%) and lends at the 30 year rate plus a Mark-Up (2.5% + 2%), then the rate of return on loans for a bank is 4.5% - 2% = 2.5%

If the fed reduces the overnight rate to zero, then the rate of return for a bank loan is 4.5% - 0% = 4.5%

4.5% > 2.5%

That is, when the Fed reduces its interest rate corridor banks' costs go down. This fits the data, because we see contractions occur after the Fed raises its overnight rate. If the banks benefited by an increase in the overnight rate, then we would see an increasing supply of loans as rates increased, and economic booms would coincide with Fed rate rises--but we see the exact opposite of this in the data, loans contract when the yield curve inverts because its less profitable to create loans, thus the money supply contracts, and the supply of funds for meeting payment obligations decreases, leading to defaults and an economic contraction.

 

We can all ignore your mother, as what she is saying is the opposite of what is occurring. The banks stand to make even more money

 

If a bank has an adjustable rate mortgage tied to prime at 4.5%, and prime goes down, the Mark-Up goes down as well. Banks were giving out adjustable rate loans like candy forecasting that the rate would increase. That is the cause for panic. They have given out too much money (most banks operate in the red) than they can forecast to receive as profit.  

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2 hours ago, mattwayne_c said:

If a bank has an adjustable rate mortgage tied to prime at 4.5%, and prime goes down, the Mark-Up goes down as well. Banks were giving out adjustable rate loans like candy forecasting that the rate would increase. That is the cause for panic. They have given out too much money (most banks operate in the red) than they can forecast to receive as profit.  

Again, just do the math. 

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