Where banks are both safe and profitable | Hacker News Reader

Where banks are both safe and profitable

economist.com

The Economist surely loves Sweden. The reason the banks are so profitable is that in the last few years they have raised mortgages from about 2% to 4% across the board. So I and most other Swedes who has borrowed money to finance their home has been hit with a huge extra monthly interest cost. Meanwhile the government has lowered the interest rate banks has to pay it to loan money to record low levels. The gap is what gives them big profits. Big gap, big profits.

And there are only four major banks so competition is out of the question. They know it is much more profitable to cooperate instead of trying to steal each others customers.

In a fair system I would be able to borrow directly from the central bank like the private banks can. Then I wouldn't have to finance their profits.

Can't you get fixed-rate mortgages in Sweden?

Usually you can fix at anywhere form 3 months to ten years.

Currently SBAB (one of banks) offers 3month list rate at 2.9% and 10 year at 4.47%. Though that 10 year fixed rate right now would be quite insane. Most likely not going to be a good choice all things considered.

In contrast to the US, mortgages in Scandinavia are rarely fixed-rate. The default is to get a mortgage with variable interest rate. The central bank publishes the "expected" central bank rate months in advance, just like in the US.

As pathy said, you can usually change your variable-interest loan into a fixed-rate loan for 3, 5 or 10 years at a time. Few people do this, because you can expect to pay more over the lifetime of the loan, as insurance. Although the percentage has been higher now, since long-term rates were at record low levels in 2011-2013.

The big killer of homeowners is unemployment, not climbing interest rates. In Norway, you regardless can't get a loan unless you are currently able to maintain a mortgage of 5 percentage points higher interest rate than the current variable rate. So the system is quite safe.

> you regardless can't get a loan unless you are currently able to maintain a mortgage of 5 percentage points higher interest rate than the current variable rate

Clever! Doubtless this prevents issues like what the US faced in the sub-prime mortgage fiasco.

Eh? I just looked at the list rates of a few of the Swedish banks and all the short term interest (3 month fixed) were below 3% while the 2+ year fixed were 3.2% and up.

Quite far from 4% and if you have decent finances you can get lower than that. Even at 4% it is a far cry from the rates of days of old.

Banks are profitable, sure. But also remember that the credit loses on mortgages in Sweden are practically zero, that contributes greatly to profitability.

Lastly, why would it be a fair system to have to lend directly from the central bank, you would not pay REPO rate as individual borrowers are significantly more risky than huge banks...

See this diagram for historical mortgage rates: http://hypotek.swedbank.se/rantor/historiska-rantor/historik... But note also that banks charge various additional fees and often doesn't allow you to borrow the whole sum for the lowest interest rate. So the effective rate is higher than advertised.

> Banks are profitable, sure. But also remember that the credit loses on mortgages in Sweden are practically zero, that contributes greatly to profitability. > Lastly, why would it be a fair system to have to lend directly from the central bank, you would not pay REPO rate as individual borrowers are significantly more risky than huge banks...

You can't in the same breath both say that mortgages are incredibly safe in Sweden and claim that they are significantly more risky than banks. Yes it makes sense that interest rates are higher for mortgages than when you lend "in bulk." But not that much higher. TFA claims 15% in profit margin which is pretty good for just shuffling money around.

My point is that there is no magic, or uber-Swedish intelligence that makes the banks financially sound and profitable which the Economist seem to think. It is that they get away with overcharging their customers, the lenders, for the meager services they provide.

Central bank lending is collateralised with liquid, tradable securities. That's why the rate is low(er). Furthermore transactions are in large size, so the cost of overheads per $ borrowed are low. If private persons are wanting to borrow a billion at a time and have appropriate assets to put up as collateral, then ok.

Central banks are not in the business of retail or micro-finance. The clue is in the name...

Sweden has mortgage free bank loans (at <=75%). Most countries don't got this, not saying it will last, but as of now, you have it.

Similar situation in Australia - the 4 big banks are enormously profitable and safe. There's a range of smaller banks and building societies though, where you probably have a bit more risk, but a better interest rate on savings.

This is partly because the Big Four are protected by an automatic government bailout, while everyone else isn't. This creates an unfair competitive advantage against the smaller orgs.

The pro is that it creates supreme investor confidence in the Oz banks (and Oz); the con is that the Big Four are using this unfair advantage to hoover up all the smaller orgs. Which could leave Oz with a pigopoly of only four banks.

Basel2 helps to even the playing field for the smaller orgs for those that choose to comply, but I feel the Oz govt needs to start blocking any further acquisitions by the Big Four.

Oz gov needs to institute IBAN and free transfers.

Neither Oz nor Canadian banks are particularly safe. They are both exposed to real estate bubbles in their respective markets.

Australian banks operate in a government protected cartel, nothing to be proud of. They are a huge drain on the economy.

I'd rather have less safe banks, or banks that at least stop making a huge profit when the world is in a global depression, and have a free banking market.

Telecom is similar -- I'm sick of the Telstra oligopoly.

and the supermarkets, and the retail malls

"Mouthwatering returns and safe" simply means that the risk has been well disguised (e.g. is off balance sheet / using creative accounting) and it hasn't blown up yet.

It's the same situation in Australia and Canada. Their time will come.

> simply means that the risk has been well disguised (e.g. is off balance sheet / using creative accounting)

Basel2 creates end-to-end transparency[1]. It is specifically designed to prevent hiding risks.

[1] http://www.investopedia.com/articles/07/basel2.asp

Not really, it has tons of flaws, some of which they are now trying to fix with Basel 3:

http://en.wikipedia.org/wiki/Basel_III

Basel2 is not perfect, but it's one million times better that what many banks were using previously (nothing). I work with banks so I've seen it firsthand.

TFA was talking about how successful such systems have been in Sweden and Oz; let's hope Basel3 is even better.

Banks can use their own risk models to set minimum capital levels:

http://www.ft.com/cms/s/0/0e8404a2-e54e-11dc-9334-0000779fd2...

Dial down the hubris please.

Apologies, that was aggressive. I've edited for tone.

I thought Basel II was depreciated after a spot of instability in 2007. After that, they started moving to Basel III.

The thing with Sweden is they've already had 'their time'. Sweden went through a major banking crisis in the early 90's and any stability you are seeing now is the result of painful lessons learned.

> "Mouthwatering returns and safe" simply means that the risk has been well disguised (e.g. is off balance sheet / using creative accounting) and it hasn't blown up yet.

Or there is a severe lack of competition (and consumer protection regulation).

>That crisis—in which Swedish authorities swiftly wrote down bad assets, moved them into a “bad bank” and recapitalised the remaining “good bank”—informed many of the bail-outs in the 2008 financial crisis.

I don't know where this came from. The swedish example was brought up many times during the crisis but always to argue that we should be doing what they did (wipe out the equity) and not what was effectively done (prop up the banks).

The magazine Economist is part owned by the Rotschild banking family and it's reporters are attending Bilderberg meetings every year. Articles in the news paper are not signed so you do not know who wrote them. http://en.wikipedia.org/wiki/The_Economist http://www.zerohedge.com/news/2013-06-03/full-list-2013s-bil...

Loan to deposit ratios, look at the furthest to the left. Danskebank, SHB, Nordea, SEB are banks operating in Sweden. http://www.zerohedge.com/news/2013-03-25/complete-and-very-d...

If you want to know more about how the FED was started "The creature from Jekyll island" http://www.bigeye.com/griffin.htm

>The magazine Economist is part owned by the Rotschild banking family and it's reporters are attending Bilderberg meetings every year. Articles in the news paper are not signed so you do not know who wrote them.

So? Why does it matter if Rothchild's own part of The Economist. Who cares if they attend Bilderberg, many influential people do. If I recall correctly, it is a good mix of politicians, Banks & Insurance and media.

As for the anonymous nature of their pieces: http://www.economist.com/blogs/economist-explains/2013/09/ec...

I was thinking they'd be talking about Canada, but yes, Sweden is sensible too.

Yeah... no. Megan McArdle lays reality out pretty clearly: Banking Without Risk Is Impossible.

http://www.bloomberg.com/news/2013-09-19/banking-without-ris...

"This emphatically does not mean I think there’s nothing we can do to make the banking system safer; like practically everyone else who writes about economics, I believe in higher capital requirements for banks, better resolution mechanisms for those that fail and more prudential regulation of how they can invest."

(from the end of your article)

Sounds like McCardle would agree with some of the Swedish approach.

"Sweden has taken a lead on regulation, imposed some of the highest capital ratios in the rich world, with minimum levels of core tier-1 capital (the best sort) set at 12% from 2015, compared with a minimum of 7% by 2019 under Basel 3... Sweden’s banks have been earning respectable profits, are able to pay dividends and have seen their share prices soar... Swedish banks are generating among the highest returns on equity among rich-world banks. Number-crunchers at Citigroup reckon that the big Swedish lenders will be generating returns of about 15% over the next few years....Australian and Nordic banks are the most cost-efficient…in the world... Credit-default-swap spreads for Sweden’s big banks, a measure of default risk, are significantly lower than for many of their peers"

Anything without risk is impossible. Including banking. Nobody's really arguing otherwise, just that we could bank with a lot less of it and some states appear to be doing that.

The part I was objecting to was the "safe" part. What we've seen over and over now is you never really know how resilient you banking sector is until you hit a real crisis.

Part of these systems include surprise "fire drills", where auditors will appear and present adverse market conditions to a bank. The bank will then have 30 days to successfully respond to the simulation. Kind of like stress testing for banks...

What we've actually seen over and over is that banks without sufficient cash reserves or proper internal and external auditing get whomped in a real crisis. Then expect taxpayers to bail them out.

Basel2 doesn't mean not taking risks. Basel2 means proving to auditors that you have enough money in reserve if you lose on your gamble. It prevents banks saying "all in on red!", then losing all their money, then going "uhm taxpayers pls bail us out now".

And from the article you linked: > "I believe in higher capital requirements for banks." That's exactly what Basel2 is.

I know there is a subset of HN who will kneejerk against any regulations, but I really can't understand why anyone would be against enforcing fiscal responsibility on our core banking systems. Especially given the massive social and taxpayer impact if the banks are irresponsible.

Oh and one last thing... Basel2 is 100% voluntary in Oz. You can choose not to comply, but then you need to hold a higher capital reserve.

For anybody who wants to know who Megan McArdle is:

http://shameproject.com/profile/megan-mcardle/

Examples:

>"In August 2007, The Atlantic hired McArdle as a business and economics blogger. Her first post, titled "Dont panic!" [sic], wrongly predicted that the liquidity shock that hit the financial system earlier that month was nothing to worry about: "Having a nasty market contraction does not mean that your economy automatically goes down the tubes.""

>That same month, in September 2008, McArdle transformed her blog at the The Atlantic into a feverish Wall Street crisis-management propaganda outlet. She argued that bankers were largely innocent, blamed government regulators and homeowners for tanking the economy, and mocked news of a criminal investigation into Wall Street crimes, writing, "For what, I have no idea." McArdle also bizarrely claimed that bankers were victims of the real estate bubble, while blaming borrowers for being greedy profiteers

It's not too difficult to see which team she is batting for.

I don't think I've ever read such a poorly founded hit piece.

Which facts in the article did you disagree with specifically?

Look at the snippet you posted and ask yourself if that could possibly by unbiased writing.

So you're of the opinion that it's invalid because the author has an open agenda, not because it's actually wrong?

You don't seem all that concerned about McArdles many biases.

No, the author is wrong. Take this, for instance:

>She argued that bankers were largely innocent, blamed government regulators and homeowners for tanking the economy, and mocked news of a criminal investigation into Wall Street crimes, writing, "For what, I have no idea."

What she's writing there shouldn't be particularly surprising to anyone who actually knows something about the industry (which she does).

There is nothing wrong with that sentence in the slightest. I could rattle off a list as long as my arm of criminal behavior by Wall Street that went unpunished (and wrecked the economy). What do you think the mortgage settlement was about? Do you think they asked for (and got) blanket indemnity against criminal prosecution from Obama for fun?

>What she's writing there shouldn't be particularly surprising to anyone who actually knows something about the industry (which she does).

She's a shill for the industry. No different to "insiders" who "know about the content industry" who predict that piracy causes trillions in economic damage.

Oh, rattle away with you "list as long as my arm". But only include behavior that's actually against the law.

It's pretty well-researched with all the citations there for anyone to review. What makes you think it's poorly founded?

That article doesn't even mention the key point of increasing reserve requirements.

She asks "why not build a banking system where this can’t happen?" but the question is "why not build a banking system where this is less likely to happen?".

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