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Australia interest rates to go lower, for longer
Topic Started: 5 Aug 2013, 07:13 PM (9,979 Views)
b_b
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miw
8 Aug 2013, 05:32 PM
Sydneyite
8 Aug 2013, 04:18 PM
Having said that, I also think it is quite possible that a bank may choose to deploy excess reserves as it sees fit on short term asset (FX, equities, commodities and so on) plays? Are there any rules / regulations that explicitly disallow this?
Basel I would say. You have to have Tier 1 capital (equity, essentially) of a certain percentage of risk-weighted assets. Your reserves are risk-weighted at 0 and have no equity requirement. As soon as you acquire risky assets, your equity requirement goes up.
Thats right.

Reserves zero weight
AAA Bonds zero weight
Mortgages (80% lvr) 50-30% weight
BBB+ corporate credit 100% weight
etc

But equity investments like shares, etc, requires dollra for dollar equity. This is ahuge drag on a banks balance sheet which is trying to target a 15% roe. And makes little or no sense with or without QE.

Elastic
8 Aug 2013, 05:36 PM
Thanks b_b for your patience.
I now realise what I was missing.
No worries. Now look at the balance sheets again and think what happens with QE. Bonds swapped for reserves. It does not touch the liability side of the balance sheet (which is where we all keep our money). It has very little real impact on anything (except as a tax).
Edited by b_b, 8 Aug 2013, 05:39 PM.
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miw
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b_b
8 Aug 2013, 05:36 PM
But equity investments like shares, etc, requires dollra for dollar equity. This is ahuge drag on a banks balance sheet which is trying to target a 15% roe. And makes little or no sense with or without QE.
You need to emphasis this point. It is huge. Much huger than as I stated it (or thought).

Let's take a business loan - rated at 100%. Tier I ratio requirement is 6.5%. Therefore if I have a million dollars of business loans on my books then I require $65k of equity.

I think what you are saying is that if I have $1M of shares on my books I need $1M of equity - i.e. shares are effectively rated at 1/.065 = 15?
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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b_b
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miw
8 Aug 2013, 05:48 PM
b_b
8 Aug 2013, 05:36 PM
But equity investments like shares, etc, requires dollra for dollar equity. This is ahuge drag on a banks balance sheet which is trying to target a 15% roe. And makes little or no sense with or without QE.
You need to emphasis this point. It is huge. Much huger than as I stated it (or thought).

Let's take a business loan - rated at 100%. Tier I ratio requirement is 6.5%. Therefore if I have a million dollars of business loans on my books then I require $65k of equity.

I think what you are saying is that if I have $1M of shares on my books I need $1M of equity - i.e. shares are effectively rated at 1/.065 = 15?
Yep.

So instead of buying $1m shares, you can write $15m in business loans. Assuming a 2% spread (after LLP's), that $300k net interest income on $1m of equity. That is 30% return on equity before head office costs.
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peter fraser
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miw
8 Aug 2013, 05:48 PM
b_b
8 Aug 2013, 05:36 PM
But equity investments like shares, etc, requires dollra for dollar equity. This is ahuge drag on a banks balance sheet which is trying to target a 15% roe. And makes little or no sense with or without QE.
You need to emphasis this point. It is huge. Much huger than as I stated it (or thought).

Let's take a business loan - rated at 100%. Tier I ratio requirement is 6.5%. Therefore if I have a million dollars of business loans on my books then I require $65k of equity.

I think what you are saying is that if I have $1M of shares on my books I need $1M of equity - i.e. shares are effectively rated at 1/.065 = 15?
Can I ask where you got the 6.5% from?

Is there a list of common lending risk weighting - eg home loans, personal loans, credit cards.

Any expressed market opinion is my own and is not to be taken as financial advice
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b_b
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peter fraser
8 Aug 2013, 06:03 PM
miw
8 Aug 2013, 05:48 PM
b_b
8 Aug 2013, 05:36 PM
But equity investments like shares, etc, requires dollra for dollar equity. This is ahuge drag on a banks balance sheet which is trying to target a 15% roe. And makes little or no sense with or without QE.
You need to emphasis this point. It is huge. Much huger than as I stated it (or thought).

Let's take a business loan - rated at 100%. Tier I ratio requirement is 6.5%. Therefore if I have a million dollars of business loans on my books then I require $65k of equity.

I think what you are saying is that if I have $1M of shares on my books I need $1M of equity - i.e. shares are effectively rated at 1/.065 = 15?
Can I ask where you got the 6.5% from?

Is there a list of common lending risk weighting - eg home loans, personal loans, credit cards.

I think it was just an assumption for the purposes of the example we were using. And good one at that.

If banks need 8% tier capital and a Business loan has a 80% Risk weighting (A- or better), then
- a $100 business loan would be weighted to $80
- Therefore the required equity to support the loan would be 8% x $80 = $6.4

That is how banking works under a risk weighted model.
(S – I) + (T - G) + (M - X) = 0
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miw
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peter fraser
8 Aug 2013, 06:03 PM
Can I ask where you got the 6.5% from?

Is there a list of common lending risk weighting - eg home loans, personal loans, credit cards.
I think I read it in a Basel wikipedia entry at some stage. It might be wrong.

Risk weightings differ by country - published by the local prudential regulator. The only list I ever found was for New Zealand once, and now I can't find it any more.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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peter fraser
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b_b
8 Aug 2013, 06:34 PM
peter fraser
8 Aug 2013, 06:03 PM
miw
8 Aug 2013, 05:48 PM
b_b
8 Aug 2013, 05:36 PM
But equity investments like shares, etc, requires dollra for dollar equity. This is ahuge drag on a banks balance sheet which is trying to target a 15% roe. And makes little or no sense with or without QE.
You need to emphasis this point. It is huge. Much huger than as I stated it (or thought).

Let's take a business loan - rated at 100%. Tier I ratio requirement is 6.5%. Therefore if I have a million dollars of business loans on my books then I require $65k of equity.

I think what you are saying is that if I have $1M of shares on my books I need $1M of equity - i.e. shares are effectively rated at 1/.065 = 15?
Can I ask where you got the 6.5% from?

Is there a list of common lending risk weighting - eg home loans, personal loans, credit cards.

I think it was just an assumption for the purposes of the example we were using. And good one at that.

If banks need 8% tier capital and a Business loan has a 80% Risk weighting (A- or better), then
- a $100 business loan would be weighted to $80
- Therefore the required equity to support the loan would be 8% x $80 = $6.4

That is how banking works under a risk weighted model.
Ah that explains a few things. I didn't realise how it was calculated.

I have an older APRA risk weighting schedule from about 2006 somewhere, and I know that the BASEL III weighting proposals are available.

It was the method that was important to me though, thanks to both of you.

Any expressed market opinion is my own and is not to be taken as financial advice
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Andrew Judd
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newjez
7 Aug 2013, 04:28 PM
B_b - The effect of QE is 'real'. You say QE has no effect, you say it's a placebo - yet it does have an effect. So you are wrong. You may not be able to adequately explain why you are wrong, and I didn't major in Economics, so I won't volunteer to pick out your flaws. But somewhere along the line. You are wrong. You basic theories which you are using are clearly wrong, because they don't match the real world. Sorry mate. That must come as a bit of a blow. But hey, maybe they just need some refinement. Sort of like Newton and Albert.
The effect of QE must be real

QE is removing quality real income earning assets from the economy that are favoured by safety concious investors because the price is too good to refuse and handing them a pile of 'cash' and inviting them to reinvest their money in a money making scheme of their choice where if nothing else they just buy the same thing at a given buying opportunity where such opportunities happen several times a week

Of course B-B knows better than more or less anybody on the forum that the effect of QE is real. and involves depression of interest rates and portfolio rebalancing where often times the yield on quality assets is so piss poor that an investor just thinks what the hell the fed is back stoping the entire financial universe and that junk is paying 10% and i can be in and out of there before anything major happens where the chances of anything major happening seem very remote for years to come.

And now of course B-B will come along here to explain it far better than i can while simultaneously he says that the fed has no idea what it is doing

:-)

The reality here is that despite my misgivings the fed has engineered an amazingly stable situation where while doom is ever present it never really gets so high on the richter scale that a doomster has something really concrete to worry about other than imaginations about what if and could be and maybe

And as they say this is new normal. For kids growing up in the future this disaster will just be another recession and just another opportunity to say 'back in my day'..............well at least that is probable and total doom seems more and more inprobable.

By the way i seem to have just sold my NZ house for much more than the valuer thought possible, after totally busting my body to get it ready for sale after over 4 years of it being empty and neglected, and yet well preserved considering, where even the valuer told told me the market is bouyant while even so he gave me what now seems like a low valuation .

Already my fixation with life in Australia or America or NZ is fading away and my life is beginning to develop a focus of normality in Finland where you guys are just so far away you are all entirely irrelevant. Pretty soon i will be thinking that even the Fed is entirely irrelevant to my life.......possibly maybe.
Edited by Andrew Judd, 8 Aug 2013, 07:46 PM.
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miw
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Andrew Judd
8 Aug 2013, 07:36 PM
QE is removing quality real income earning assets from the economy that are favoured by safety concious investors because the price is too good to refuse and handing them a pile of 'cash' and inviting them to reinvest their money in a money making scheme of their choice where if nothing else they just buy the same thing at a given buying opportunity where such opportunities happen several times a week
Nobody is going up to bondholders with a gun and taking the assets away. The fed is just paying more than what people think should be the market price for those bonds. Otherwise they would not sell. As a result the yield curve is shallower/flatter than it otherwise would be. In that sense the effect of QE is real. As you say, those people then have the problem of what to do with their cash. And of course contrary to what a few people seem to assume, a big enough proportion of the sellers are not banks so arguments about reserves are moot.

Quote:
 
The reality here is that despite my misgivings the fed has engineered an amazingly stable situation where while doom is ever present it never really gets so high on the richter scale that a doomster has something really concrete to worry about other than imaginations about what if and could be and maybe


That would pretty much encapsulate my opinion as well. I think the other main effect of QE besides depressing the yield curve is that it has removed a number of tail risks to do with liquidity crunches.

Quote:
 
By the way i seem to have just sold my NZ house for much more than the valuer thought possible, after totally busting my body to get it ready for sale after over 4 years of it being empty and neglected, and yet well preserved considering, where even the valuer told told me the market is bouyant while even so he gave me what now seems like a low valuation .


Glad to hear you had a win on that front.
Edited by miw, 8 Aug 2013, 08:00 PM.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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b_b
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Andrew Judd
8 Aug 2013, 07:36 PM
The effect of QE must be real

QE is removing quality real income earning assets from the economy that are favoured by safety concious investors because the price is too good to refuse and handing them a pile of 'cash' and inviting them to reinvest their money in a money making scheme of their choice where if nothing else they just buy the same thing at a given buying opportunity where such opportunities happen several times a week

Of course B-B knows better than more or less anybody on the forum that the effect of QE is real. and involves depression of interest rates and portfolio rebalancing where often times the yield on quality assets is so piss poor that an investor just thinks what the hell the fed is back stoping the entire financial universe and that junk is paying 10% and i can be in and out of there before anything major happens where the chances of anything major happening seem very remote for years to come.

And now of course B-B will come along here to explain it far better than i can while simultaneously he says that the fed has no idea what it is doing

:-)

The reality here is that despite my misgivings the fed has engineered an amazingly stable situation where while doom is ever present it never really gets so high on the richter scale that a doomster has something really concrete to worry about other than imaginations about what if and could be and maybe

And as they say this is new normal. For kids growing up in the future this disaster will just be another recession and just another opportunity to say 'back in my day'..............well at least that is probable and total doom seems more and more inprobable.

By the way i seem to have just sold my NZ house for much more than the valuer thought possible, after totally busting my body to get it ready for sale after over 4 years of it being empty and neglected, and yet well preserved considering, where even the valuer told told me the market is bouyant while even so he gave me what now seems like a low valuation .

Already my fixation with life in Australia or America or NZ is fading away and my life is beginning to develop a focus of normality in Finland where you guys are just so far away you are all entirely irrelevant. Pretty soon i will be thinking that even the Fed is entirely irrelevant to my life.......possibly maybe.
Yes - we is supers ing yields. Except qe2 and qe3 have both pushed the long end up. The Fastest decline in bond yields in living memory when qe2 ended and the us was downgrades (July 2011.

As usual Andrew, great story. Pity about the facts.
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