Why FI rely on GIC INSTEAD of borrowing from bond market? | GIC discussions | Discussion forum

Please consider registering
guest

sp_LogInOut Log In sp_Registration Register

Register | Lost password?
Advanced Search

— Forum Scope —




— Match —





— Forum Options —





Minimum search word length is 3 characters - maximum search word length is 84 characters

sp_Feed Topic RSS sp_TopicIcon
Why FI rely on GIC INSTEAD of borrowing from bond market?
November 30, 2022
7:30 pm
oltunde
Member
Members
Forum Posts: 14
Member Since:
October 12, 2022
sp_UserOfflineSmall Offline

I am not an expert, so my question may be wrongly worded. I hear gic rates are based on 5 y bond yield! So bond yield on 5 y canada bond is 3.17 today.

So can FI borrow from bond! Market instead of offering 5.5% gic?
Yield comin down but I see 5 y gic from gic broker going up! Why?

Thanks

December 1, 2022
5:33 am
savemoresaveoften
Member
Members
Forum Posts: 2747
Member Since:
March 30, 2017
sp_UserOfflineSmall Offline

Truth is they DONT rely on GIC funding.

One major advantages GIC over bonds is there is a min size you need for any bond issues to make it economical and worthwhile, it will be a laugh to issue say just a $20mm bonds, while they can get to that number thru thru branch GIC sales easily. And imagine trying to match up terms (e.g. 1 vs 5 years) as well.

Also GIC is an excuse to get them to the face of the clients, to cross sell other products. Branch does not have the ability to handle corp bonds, you need the investment dealer.

Finally issuing bonds need not be a cheaper funding source than GIC. GIC just like a corporate bond, is priced off a credit spread over GC to some extent (the CDIC protection kind of makes GIC "cheaper" to the issuer).

GIC brokers offering a higher rate is a market inefficiency that CUs are "ok" to pay away. To me that is more old school traditional treasury management that CUs are just not optimizing their funding cost. Just like big banks use to actively employ mortgage brokers, but now most are done in house....

December 1, 2022
6:09 am
Norman1
Member
Members
Forum Posts: 6679
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

GIC rates are not based on Government of Canada bond yields.

The deposit taking financial institutions are in the "money rental" business. They set their GIC rates at a point that brings in deposit money at a speed that matches how fast they lend the money out.

As savemoresaveoften wrote, they don't rely on GIC's alone. Some of them do borrow from the bond market as well as issue GIC's. None of them can borrow at Government of Canada bond rates because none of them in Canada have the AAA debt rating that the Government of Canada has.

For example, Bank of Nova Scotia has a AA rating from DBRS. The Bank of Nova Scotia 1.4% November 1, 2027 bond trades around a yield to maturity of 5.2% per annum.

Please write your comments in the forum.