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Real After Tax Term Deposit Returns for Australian Savers are Negative; Savers Punished. Debtors Rewarded. Tax and Inflation Work for Borrowers and Against Savers.
Topic Started: 6 Mar 2012, 11:00 AM (20,808 Views)
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How to beat the rate cut blues

PUBLISHED: 12 Oct 2012 14:59:00
Christopher Joye

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As the Reserve Bank of Australia slashes its cash rate to near 40-year lows, savers and retirees are watching their incomes fall. While advocates of low rates are ubiquitous in the media, most of the complaints to the RBA are from the numerically larger savings population.

Today the average bank deposit rate is a touch under 3.5 per cent, which just covers the cost of living. Many investors are being forced to hunt for better yields. And with higher yield inevitably comes greater risk of loss and product complexity.

Australian Securities and Investments Commission chairman Greg Medcraft can see the emerging problems caused by low rates. It is an eerie echo of the time before the global financial crisis when the US Federal Reserve’s excessively loose monetary policy led investors to search out superior returns via byzantine products. Having been Société Générale’s head of securitisation in the US, Medcraft implicitly understands this territory.

Today I want to try to unify the universe of investment options available to you through the prism of a major bank. There are six different ways you can earn money providing finance to the banks. Comparing this range of products is an elegant way to wrap your mind around the trade-off between risk and return.

In my first chart, I have summarised the alternatives. Remember a bank is made up of money it sources from shareholders (“equity”) and creditors. A bank’s business model is to raise capital as cheaply as possible and lend it back out at the highest interest rate. The gap between its cost of funding and what it earns is called the net interest margin.

When you put savings into a deposit, you are lending to the bank. As my chart shows, banks love deposits because they are the least expensive way to find funding. They also give the lowest returns. Indeed, transaction accounts typically pay a near-zero interest rate. The benefit, of course, is that deposits are safe, though not risk-free.

One oversight in our regulatory framework is that you are not told of bank (or government) credit risk when you lend to them. There is no good reason for this. History proves banks can fail, and governments can default. At the very least, deposit-takers should disclose the risks you assume when extending them credit.

Beyond deposits, we can supply funding to a bank by investing in their “bonds”, which is another type of loan, their “equity” (ie, shares) or some mix of the two via Frankenstein-style “hybrids”.

The safest of all bank investments is a “covered bond”, which is secured by a specifically identified pool of assets. If the bank goes bust, you have recourse to these assets ahead of anyone, including depositors. In fact, the “AAA” covered bond rating is higher than the bank’s “AA-“ rating.

While covered bonds may have a five-year term, you can trade in and out of them every day. They are bought and sold in the liquid “wholesale” bond market, and settled via a platform called Austraclear, which the Australian Stock Exchange owns. And, like a variable or fixed-term deposit, you can get “floating” or fixed covered bonds.

A fixed covered bond pays the same coupon over its life. The variable option provides a predetermined margin above a variable benchmark that is reset every quarter. This benchmark broadly tracks the RBA’s cash rate, and is called the 90-day bank bill swap rate. Today it is around 3.2 per cent. CBA’s variable rate covered bond currently pays 3.9 per cent, which is slightly better than the average bank deposit.

As my second chart shows, there has been a striking compression in the cost of bank bonds. When CBA issued its first covered bond in January, it was required to pay investors a margin of 1.75 per cent above the bank bill rate. Today the same bond offers a margin of only 0.7 per cent. While incoming investors are receiving lower returns, the original ones made terrific capital gains through an increase in the bond’s price as CBA’s perceived risks declined. This highlights a distinction from normal deposits. Whereas bank deposits never get “revalued”, bonds are repriced every day based on investors’ assessments of the institution’s creditworthiness.

Read more: http://www.afr.com/p/blogs/christopher_joye/how_to_beat_the_rate_cut_blues_uiArT9jvJfqBMowxugfLTI
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Ex BP Golly
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That $80k the bank forced me to stick in a term deposit for 5 years at 7.2% to to up my lvr on the farm has paid of big time :lol
Especially so since farm prices took off shortly afterwards :D and I came into more rewarding circumstances!

Bubblepedians will remeber my ranting on that years ago, and while I could have put that money to far better use, I'm not crying about it now.

I guess the banks were just desperate for cash.... Like I too was back then.

Another of lifes valuable lessons.
Edited by Ex BP Golly, 15 Oct 2012, 12:25 PM.
WHAT WOULD EDDIE DO? MAAAATE!
Share a cot with Milton?
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Count du Monet
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oday the average bank deposit rate is a touch under 3.5 per cent, which just covers the cost of living. Many investors are being forced to hunt for better yields. And with higher yield inevitably comes greater risk of loss and product complexity.


But the real erosion of purchase power is 5.5% pa, although the ABS only counts 2 to 3% CPI. The currency has increased 5.5% per capita for the year. Which means if you got long term savings in cash, these even at this stage are better off in gold.
Ex BP Golly
15 Oct 2012, 12:24 PM
That $80k the bank forced me to stick in a term deposit for 5 years at 7.2% to to up my lvr on the farm has paid of big time :lol
Especially so since farm prices took off shortly afterwards :D and I came into more rewarding circumstances!

Bubblepedians will remeber my ranting on that years ago, and while I could have put that money to far better use, I'm not crying about it now.

I guess the banks were just desperate for cash.... Like I too was back then.

Another of lifes valuable lessons.
In my estimation if you've returned 5.5% pa after tax, then you've broken even.
Edited by Count du Monet, 15 Oct 2012, 02:54 PM.
The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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Frank Castle
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Business As Usual

Ex BP Golly
15 Oct 2012, 12:24 PM
term deposit for 5 years at 7.2%
And after that?
5%.....Less?
Ignore posts by The Whole Truth · View Post · End Ignoring
The forum fuckwit goes RRRAAARRRGGHHhhh - But not a fuck was given..................by anyone.
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b_b
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Count du Monet
15 Oct 2012, 02:52 PM
oday the average bank deposit rate is a touch under 3.5 per cent, which just covers the cost of living. Many investors are being forced to hunt for better yields. And with higher yield inevitably comes greater risk of loss and product complexity.


But the real erosion of purchase power is 5.5% pa, although the ABS only counts 2 to 3% CPI. The currency has increased 5.5% per capita for the year. Which means if you got long term savings in cash, these even at this stage are better off in gold.

In my estimation if you've returned 5.5% pa after tax, then you've broken even.[/quote]


----------------------
Not sure what you mean by the real erosion of purchase power is 5.5%. Are you saying this is the real inflation rate?
Edited by b_b, 15 Oct 2012, 04:31 PM.
(S – I) + (T - G) + (M - X) = 0
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Ex BP Golly
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Frank Castle
15 Oct 2012, 03:09 PM
And after that?
5%.....Less?
Like I said, I wasn't happy, and at the time it was a big imposition, but as I know the bank is now pissed off, its a small price to pay.

Now I have a shit load more money, and getting better all the time, this bank will not get a look in with me ever again :lol

My dollars these days return a very healthy % & that 80k would have been most useful a few years back.

Now its play money. I could pull it and take a little hit, but I prefer to leave it there as it makes me happy. Plus its good to have cash tucked away where its government protected :lol

At least if you clowns f everything up, those dollars are reasonably safe.

If only my other protected cash was getting the same% :to:
WHAT WOULD EDDIE DO? MAAAATE!
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Deposit rates fall - but savers still ahead of borrowers

October 18, 2012
Chris Zappone

While banks have cut the full 25 basis points off deposit rates in the aftermath of the Reserve Bank’s October rate cut, savers are still slightly ahead of borrowers since the central bank began cutting late last year.

Since the RBA began lowering rates this cycle in November 2011, it has reduced the cash rate by 1.5 percentage points to 3.25 per cent. The major banks, in an effort to hold on to depositors, have cut rates less than the full amount in that time - and less than they've cut mortgage rates.

ANZ's Progress Saver, for example, has fallen 1.1 percentage points, while CBA's NetBank saver has dropped 1 percentage point. In the same period, Westpac's Reward Saver has fallen 99 basis points, while NAB's iSaver rate has been cut by 90 basis points.

"Savings account rates have remained relatively higher than the cash rate for the past few years in a bid for institutions to encourage household deposits, which was great for savers," said RateCity spokeswoman Michelle Hutchinson.

The banks’ relative generosity on deposit rates may be ending, however, as the high cost of courting savers takes its toll on profits.

Following the RBA’s latest move, cutting official rates by 25 basis points to 3.25 per cent, ANZ Bank cuts its Progress Saver account by 25 basis points to a base and bonus rate of 4.91 per cent. Commonwealth Bank's NetBank Saver has also fallen 25 basis points, to 4.75 per cent, equal to National Australia Bank's iSaver after the official cut, according to financial comparison site Rate City.

"These high rates were unsustainable for the long term for institutions and we're now starting to see savings account rates coming down from these unusually high levels," said Ms Hutchinson.

Of the major lenders, Westpac's Reward Saver has the highest rate, 5.01 per cent, after that bank also cut 25 basis points.

Banks have been less generous in passing on mortgage rate reductions over the past year, with ANZ Bank pioneering a separate pricing review strategy to break the link in consumers' minds between RBA and bank moves.

Read more: http://www.smh.com.au/business/deposit-rates-fall--but-savers-still-ahead-of-borrowers-20121018-27tdt.html
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Christopher Joye: Real bank deposit savings rates are currently negative. Contemporary savers getting a terrible deal.
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Bank deposit rates about to fall: Bendigo

February 18, 2013 - 1:49PM
Clancy Yeates

The fierce competition for funds that has caused banks to pay over the odds for deposits is likely to ease this year, Bendigo and Adelaide Bank chief executive Mike Hirst says.

Since the global financial crisis, savers have benefited from relatively high interest rates on online saving accounts and term deposits, as banks sought to obtain a greater share of their funding from these more stable sources.

The so-called war for deposits has also been blamed by banks for pushing up funding costs, and causing them to only pass on cash rate reductions in part.

With the relative calm on financial markets now making it cheaper for big banks to access wholesale funding, Mr Hirst today said there had recently been some easing in the competition for deposits, and this was likely to continue.

‘‘At the end of the day people are interested in having a stable funding base and the maturity is important in that,’’ he told analysts. ‘‘I would expect that as long as there’s continued strength in those wholesale funding markets I would think there will be some abatement around the pricing of retail deposits.’’

It comes after the Commonwealth Bank’s chief executive, Ian Narev, last week said wholesale markets had improved significantly, though he could not predict what this would mean for competition for deposits.

Mr Hirst also departed from the view of the big banks a year ago when he predicted funding costs would start easing, and he noted on Monday that his views had not always eventuated in the past.

Read more: http://www.smh.com.au/business/bank-deposit-rates-about-to-fall-bendigo-20130218-2emk6.html
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Count du Monet
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The so-called war for deposits has also been blamed by banks for pushing up funding costs, and causing them to only pass on cash rate reductions in part.


War for deposits? They pay less than the money is being devalued at.
The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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