What's the big deal about rates?

Discussion in 'Economics' started by Froglet, Sep 6, 2011.

  1. Froglet


    I always hear the TV guys yack about 10 year, 30 year treasury rates, about it being at historic lows. What does this really mean?

    Will it actually push mortgage rates down? If so, I don't understand what the 'real' logic is w/ mortgage rates, granted there are many factors.

    Does this essentially mean bank profitibility is hurt, thus the sell off? And not because of the debt woes?

    Anybody into REAL BANKING, not just TV JARGON? I could use some pointers in terms of where to look regarding assets and liabilities.

    Thank you.
  2. Doesn't matter. Banks don't lend anymore.

  3. GTS


  4. Froglet


    That's exactly what I'm reading. That's the dilemma banks are faced with. If they aren't lending, they WILL DIE. They are paying for the deposits and are forced to lock in rates at HISTORIC lows! So is this a reason why bank stocks are trashed? I do not believe the 'debt' crisis crap, because banks HEDGE themselves, but when it comes down to the operational back bone of the business, it seems like they are forced to play the hand based on whatever bernake and the economy deals them.

    I wanted to ask if anyone was in the industry, because low rates don't seem to do banks any good, as they are ultimately tied to the real estate industry.
  5. Look up the causes of the S&L crisis. It was precisely this: they had lots of low-rate 30 year mortgages outstanding, but were paying much more on deposits. The gap killed them.
    The S&L industry is gone, having been absorbed into the regular banking industry. So the problem that was particular to them is now, or will be, once rates go up, as they one day will, the problem of the typical bank. Should be fun.
  6. Froglet


    Thanks. I'll look into it.

    A lot of people get caught up w/ the BAC< JPM, WFC, but there are lots of regional banks that operate on a S&L model. Either way, the rate environment is a challenge.

    Having gone through S&L, why don't banks 'learn' from it and strategize around it?
  7. It's a wee bit worse than that.
    Commercial banks that were peripheral players, if that, in residential mortgages, now do them as part of their normal business. That means all the big ones: BAC, JPM, C, whomever. 2008 was all about subprime mortgages; all these guys were big into this business.
    What you're pointing out just may be the other shoe that will drop in a few years, re these big banks, which is what I was trying to say. The problem may be in your local neighborhood bank, but those guys the FDIC can handle. But the really big too big to fail guys? No one can really handle a failure by any of them, and if this scenario plays out, we all know there won't be any patience by anyone, left or right, for saving them again. The fun will really start then.
  8. Why even use the interest rate as the method of receiving return. I have been writing a new banking system that has three factors that affect risk.

    I was writing about the limitations of interest rates with macroeconomics in the negative interest rate thread. There are fundamental issues with the way banking works at the moment.

    The lending will never get back to what it was because the risk can no longer be past on to the people who buy credit derivatives because the subprime mortgate market is failing.

    You need a new banking system.
  9. Froglet


    I'm curious where and what I can do to at least study duration gap, asset/liability models and simple concepts before actually just jumping on the revolution ship.

    I am sure there is more than what meets the eye and I think I want to understand this to help myself grasp the situation at hand. Say a bank has various maturing liabilities (Deposits), 1 month, 6 month, 1 year, 5 year, x year) CDs, now how would you guage risk when you match that w/ 15, 30 year fixed rate mtges?

    I want to read about that, but google hasn't really shown me results, and often throw me complex formulas! lolz
  10. Froglet


    Yes, I'm sure we have not forgotten the EVERY FRIDAY = A BANK CLOSES FRIDAY right? I'm sure because of this crisis, these banks are failing because of bad assets (loans) as opposed to VERY LOW INTEREST LIABILITIES (deposits). I want to dig deeper and understand the basic frame work regarding this.

    Perhaps someone that works in this dept in a bank can help? How do they underwrite the loans, and price products?
    #10     Sep 7, 2011