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Falling behind the competition?
August 10, 2022
2:44 pm
Loonie
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Most FIs have always had fees for registered account transfers, and they increase them regularly. Hubert does not although probably will by the time the merger with Access is complete.

August 15, 2022
12:25 pm
AllanB
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EQ is a rip off they are a subprime lender. Wouldn't their GIC rates rise in Sept if BoC increases?

August 15, 2022
1:14 pm
Bill
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I thought it's been established here that bond rates, not central bank interest rate announcements, are what impact GIC rates. Far as I remember.

August 15, 2022
1:52 pm
Loonie
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Bill said
I thought it's been established here that bond rates, not central bank interest rate announcements, are what impact GIC rates. Far as I remember.  

As I recall, we've been given 3 explanations so far.
First we were told that retail rates anticipate expected BoC rates.
Then, when that proved unreliable (and anyone's guess), we were told they followed government bond rates.
Most recently, we have been told that they reflect a number of factors including but not limited to each FI's financial needs. We've also been told that each GIC is matched to a corresponding loan, which is obviously not necessarily true.

Take your pick.
I believe that it's always related to estimates of profit and loss over time, an alchemy of many factors, with a view to reporting periods, and that the average person will never be able to permeate these depths.
Make of it what you will.

August 15, 2022
3:13 pm
Bill
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I was referring to gic rates in general, not for specific fi's as they clearly adjust their rates whenever they want to encourage or discourage gic sales for each separate duration. And I think we understand that specific gics are not matched with specific mortgages, it's more along the lines of matching the overall dollar amount of their 5-year mortgage portfolio with their 5-year gic pool, the 4-year with the 4-year, and so on, raising and lowering rates as needed to maintain the matching in each duration category as closely as possible.

But aside from the normal individual fi machinations re their own particular daily need or not for deposits, it's clear that gic rates in general are related to something, i.e. they're all up substantially this year, and so have central banks raised rates substantially. I figure central banks raise cost of money thus borrowers (eg mortgages) have to pay higher interest, I get that. So I figure gic rates go up a bit too because fi's have to make sure they're still bringing in the funds to loan out, they're in competition with each other for savers' money and the higher loan rates allow them to pay higher gic rates. But, as I said, some have said it's the bond market that is the prime mover re gic rates.

August 15, 2022
3:28 pm
AltaRed
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I agree retail investors will never know with reasonable certainty what any one, or group of, FIs will do with their rates and why. It is obviously complex. e.g. need for funds of a certain term, competitor rates, GoC bond yields, etc.

Clearly NIM is a key factor in FI profitability, so they need to manage that with an appropriate spread between GIC rates and mortgage rates.

From a big bank perspective, there is a timely G&M article (behind paywall) by Robert McLister explaining rates for 5 year fixed term mortgages. https://www.theglobeandmail.com/investing/personal-finance/household-finances/article-will-fixed-rates-follow-bond-rates-down-mortgage-shoppers-want-to-know/ Apparently the closest proxy is the 4 year swap rate. Excerpt follows.....

The closest proxy is the four-year swap rate, which banks often use because it roughly matches the 3.8-year average duration of a five-year mortgage. Side note: Five-year mortgages only last 3.8 years, by the way, because borrowers break mortgages early.

Swaps are a better indicator of fixed-rate direction than the more commonly cited five-year bond yield for two reasons. For one, banks use swaps to hedge five-year fixed mortgages. For another, swap pricing incorporates bank credit risk, and the supply and demand for mortgage funding.

What is a swap?

It’s basically a swap of cash flows.

Without getting too far into the weeds, swaps let a bank convert its variable funding costs to fixed funding costs, to reduce risk.

Essentially, the bank makes a stream of fixed payments (which come from the fixed-rate mortgage borrower) to the swap counterparty and in return the swap counterparty pays the bank with floating payments at an agreed-upon rate.

The banks can then sell a five-year fixed mortgage at a higher rate, for example, and guarantee a fixed profit spread.

Banks use swaps in mortgage funding because so much of their mortgage funds come from the floating-rate market (for example, deposits, bankers’ acceptances, overnight loans, and so on). If banks didn’t use swaps, their floating rates liabilities could exceed their rates on fixed mortgages, and they could take a loss.
Where to find swap rates

The problem with swap rates is that they’re harder to find than the most common fixed-rate indicator, Canada’s five-year bond yield.

One place to look for four-year swap rates is RBC’s website: rbccm.com/en/expertise/fixed-income/notes-canada.page

It is pretty clear there are many levers that go into decision making on rates, both from an HISA/GIC perspective and mortgage rates.

August 15, 2022
6:54 pm
Norman1
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AltaRed said

From a big bank perspective, there is a timely G&M article (behind paywall) by Robert McLister explaining rates for 5 year fixed term mortgages. https://www.theglobeandmail.com/investing/personal-finance/household-finances/article-will-fixed-rates-follow-bond-rates-down-mortgage-shoppers-want-to-know/ Apparently the closest proxy is the 4 year swap rate. Excerpt follows.....

An interest rate swap just protects the spread between, for example, a five-year floating rate deposit and a five-year fixed rate mortgage.

The swap cannot transform a floating-rate HISA deposit into a five-year GIC. The counterparty of the swap of the interest payments won't replace the HISA deposit should the deposit be withdrawn by the depositor.

Why do it the hard way with an interest rate swap that involves another party who may default on the swap?

If needed, just pay a little bit more on five-year GIC's to raise five-year fixed-rate funds and use those funds to fund the five-year fixed-rate mortgages!

When too much five-year GIC money is flowing in, lower the rate paid until the flow slows.

August 15, 2022
7:22 pm
AltaRed
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The entire G&M article was worth reading for insight that I did not have before, that being another factor in the setting of GIC rates and mortgage rates. There is an awful amount of cash on deposit in chequing and savings accounts so the swap rate is important IF an FI has far too much disconnect between such deposits and fixed term mortgages.

I always believed there was a very strong connection between GIC terms and fixed term mortgages, and a strong correlation (measured in spread) to GoC bond yields of similar terms. I still believe in that correlation but swaps muddy the water somewhat, even if those correlations are more appropriately associated with the big banks rather than alternative lenders.

There seems to be a growing disconnect in recent weeks between big banks and smaller alternative lenders in longer term GIC rates. The larger institutions have either inverted the yield curve on their longer term GICs per the GoC bond yield curve, or are essentially flat across terms.... while the smaller alternative institutions still are showing the traditional northeast trend in yields vs term. IOW, the gap is widening at 3-5 year GIC terms.

August 16, 2022
8:49 am
Norman1
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AltaRed said
… There is an awful amount of cash on deposit in chequing and savings accounts so the swap rate is important IF an FI has far too much disconnect between such deposits and fixed term mortgages.

It isn't a factor because the chequing and savings deposits cannot be swapped into a long-term fixed-rate funding without someone backstopping the deposits. Such deposits can be withdrawn anytime.

Whoever is providing such backstop will charge for being ready and willing to fund on demand.

The Government of Canada bond spreads are just starting points. They don't determine the GIC rates. If a bank really doesn't want any more 3-year funds, they will drop their 3-year GIC rate below the rate of Government of Canada treasury bills.

That way, if anyone still places money in their 3-year GIC's, then the money can be parked in treasury bills and still earn a positive spread. It doesn't matter what the Government of Canada 3-year bonds are yielding.

The writer of the article is confusing something that seems to correlate with GIC rates with what the GIC issuers actually do.

August 16, 2022
9:59 am
AltaRed
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I am not going to pretend to know nearly as much as you do on this subject matter so will obviously defer to you on your views of it.

What is ultimately telling though in a number of threads on this forum is the apparent lack of understanding* by so many folk on why FIs do what they do with their HISA and GIC rates. FIs are in the business of profitable operations and they will do what it takes to optimize profitability. GICs and HISAs are simply a source of debt for them and they will only do what they need to do to attract the funds they need.

Depositors are ultimately only commodities to them. Playing nice with their depositors is strictly a means of potentially attracting cheaper debt, i.e. me as a consumer perhaps willing to accept only 2% on a HISA deposit with a 'nice' company, than getting 2.2% with a 'brusque/rogue' company. No one should necessarily assume anything more.

* Or maybe it is simply an expression of frustration rather than actual misunderstanding.

August 16, 2022
10:55 am
Bill
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In their defence, this "lack of understanding" is partially fomented by the private sector itself by its marketing of its own so-called dedication to non-commercial, social issues such as saving the planet, local communities, diversity and other social justice issues, etc, i.e. the ESG movement. So it's not surprising that many people now expect "fairness", etc vs understanding that at bottom commercial transactions are always simply about self-interest of each party, i.e. money.

August 17, 2022
9:27 am
AllanB
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All their excess deposits is courtesy of you the taxpayer from the phoney stimulus.

August 17, 2022
11:11 am
savemoresaveoften
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Its obviously for the past few months GIC rates HAVE to go up, as BoC O/N moved from 0.25% to 2.5% and to be higher yet again. Same with bond yields going up as both demand and supply of funds dictate the "appropriate" level for funds to change hands at.
Other than the market force making it happen, its naive to think FIs will just raise their rates to match the Bank rate. Why would a FI need/want to do that, esp if they can continue to source cheap funding easily ? Its a profit making business after all, not welfare.
Interest rate swap will "convert" fixed rate commitments to floating, thats exactly what a IR swap does. But its done at the treasury big picture level, not swapping particular GIC or HISA into the "other" kind. Its always the big picture, dont think of it like a individual's wallet...

And like I said 2 months ago, when 1 year GIC printed 4-4.25, the market was already way ahead of itself, exactly the reason why I predicted zero chance 1y GIC will hit 5% by end of August (Think I did not have typo this time, lol)

August 17, 2022
11:11 am
cgouimet
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AllanB said
All their excess deposits is courtesy of you the taxpayer from the phoney stimulus.  

Such positivity once again ...

CGO
August 17, 2022
11:14 am
savemoresaveoften
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cgouimet said

Such positivity once again ...  

Allan just provide us with a joke of the day every day past few days 🙂

August 17, 2022
11:19 am
cgouimet
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savemoresaveoften said

Allan just provide us with a joke of the day every day past few days 🙂  

I'm just curious about his Corn Flakes ...

CGO
August 17, 2022
12:49 pm
AllanB
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savemoresaveoften said
Its a profit making business after all, not welfare.
  

Corporate welfare has ballooned I think more was given to corporate teats than individuals in all of Canada this past couple years.

savemoresaveoften said

Allan just provide us with a joke of the day every day past few days 🙂  

They are laughing all the way to the bank

August 17, 2022
1:38 pm
cgouimet
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AllanB said

Corporate welfare has ballooned I think more was given to corporate teats than individuals in all of Canada this past couple years.

savemoresaveoften said

Allan just provide us with a joke of the day every day past few days 🙂  

They are laughing all the way to the bank  

And, some perhaps all the way to the farm ...

CGO
August 19, 2022
11:19 am
RetirEd
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When I was born, corporate and individual taxes each funded about half of the US tax take; the latest stats show corporate at less than 1%. In Canada, several years ago, our corporate tax take was below 5% - I wonder what it is now.

The primary diver of this is an international (and inter-provincial/inter-state) "race to the bottom" on corporate tax.

And before people start yelling "but all the corporate money comes from individuals anyway," remember that some comes from offshore business or tax relocation; some comes from financial maneuvering; and businesses will take whatever the market will give them. As long as they're still making more money than they can get somewhere else, they won't stop paying those corporate taxes until there's no money to be made to pay them. Higher corporate taxes DO shift the tax burden in a seroius way.
RetirEd

RetirEd

August 19, 2022
11:56 am
Bill
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Been a while since we've had Conservative rule, plus everybody hates large corporations so would be hugely popular to increase corporate taxes meaningfully, so why haven't Libs, with NDP support, massively increased corporate taxes? Seems like an easy solution, everybody wants it, what's the hold up?

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