AIB struggling to maintain profit margins and the answer to their problem.

realitykeeper

I have seen a number of articles pertaining to AIB recently, this being one of them: https://www.businessworld.ie/financial-news/Negative-interest-rates-weigh-on-margins-at-AIB-573101.html

Like all banks in the EU, AIB are required to keep a certain amount of money in reserve as a buffer against an economic shock or downturn. However, the ECB want banks to put their money to work instead of hoarding it. To discourage the hoarding of cash, the ECB have a negative rate of interest so any bank parking cash with the ECB must pay.

Paying to keep cash in cash is squeezing AIB profit margins and so they are laying off hundreds of staff to preserve profits.

I think that what AIB and other Irish banks (including the Irish central bank) should do is buy gold bullion and store it in their vaults. Gold is money in the traditional sense and paper is not money in the tradition sense, so really they should be buying gold. The policy of QE and easy credit cannot be sustained forever and ultimately these will cause very high inflation in the price of everything including gold.

I am not saying banks should buy gold to make a profit. That would be to miss the point. I think banks should buy gold to survive an economic crisis because the next time they get into difficulty, the state will not be in a position to help like before. That said, the state might be able to help if the Irish central bank buys quite a lot of gold before the next economic crisis.

Geuze

Did you ever consider going to college and studying economics?

Geuze

https://voxeu.org/article/low-long-interest-rates-and-net-interest-margins-banks

https://voxeu.org/article/monetary-policy-and-bank-equity-values-time-low-and-negative-interest-rates

Geuze

realitykeeper wrote: »

Like all banks in the EU, AIB are required to keep a certain amount of money in reserve as a buffer against an economic shock or downturn. However, the ECB want banks to put their money to work instead of hoarding it. To discourage the hoarding of cash, the ECB have a negative rate of interest so any bank parking cash with the ECB must pay.

This reserve is known as bank capital.

https://www.consilium.europa.eu/en/policies/banking-union/single-rulebook/capital-requirements/

1. The capital requirements regulation (CRR) - key points
The regulation, which is directly applicable in all EU member states, lays down prudential requirements for capital, liquidity and credit risk for investment firms and credit institutions ('banks').

Capital requirements
The regulation requires banks to have set aside enough capital to cover unexpected losses and keep themselves solvent in a crisis. As a main principle, the amount of capital required depends on the risk attached to the assets of a particular bank.

In the capital requirements regulation, this is referred to as the 'own funds requirement' and is expressed as a percentage of risk-weighted assets. The risk-weighted assets concept in essence means that safer assets are attributed a lower allocation of capital, while riskier assets are given a higher risk-weight. In other words, the riskier the assets, the more capital the bank has to set aside.

The capital is assigned certain grades according to its quality and risk.

Tier 1 capital is considered to be the going concern capital. The going concern capital allows a bank to continue its activities and keeps it solvent. The highest quality of Tier 1 capital is called common equity tier 1 (CET1) capital.

Tier 2 capital is considered to be gone concern capital. The gone concern capital allows an institution to repay depositors and senior creditors if a bank became insolvent.

A total amount of capital that banks and investment firms are required to hold should be equal to at least 8% of risk-weighted assets. The share that has to be of the highest quality capital - common equity tier 1 - should make up 4.5% of risk-weighted assets (up to December 2014 - between 4% and 4.5%).

Geuze

realitykeeper wrote: »

I have seen a number of articles pertaining to AIB recently, this being one of them: https://www.businessworld.ie/financial-news/Negative-interest-rates-weigh-on-margins-at-AIB-573101.html

Like all banks in the EU, AIB are required to keep a certain amount of money in reserve as a buffer against an economic shock or downturn. However, the ECB want banks to put their money to work instead of hoarding it. To discourage the hoarding of cash, the ECB have a negative rate of interest so any bank parking cash with the ECB must pay.

Paying to keep cash in cash is squeezing AIB profit margins and so they are laying off hundreds of staff to preserve profits.

You seem to think that a bank's capital buffer must be deposited with the ECB.

This is not the case.

All the ECB requires is the size of the capital buffer that the bank must have.

realitykeeper

realitykeeper wrote: »

I think that what AIB and other Irish banks (including the Irish central bank) should do is buy gold bullion and store it in their vaults. Gold is money in the traditional sense and paper is not money in the tradition sense, so really they should be buying gold.

A foolproof scheme with one slight flaw: It doesn't survive on contact with reality.

Waterford Whispers should snap you up immediately.

realitykeeper

I am seeing a lot of conventional wisdom posted here and precious little unconventional wisdom. In a low interest rate environment, it is difficult for a bank to keep a lot of cash in reserve. The safer they want to keep the cash, the lower the interest rate will be eg the negative interest rate offered by the ECB. Gold can go up or down but in the case of an economic shock, (that is when the bank`s reserves will be required) the price of gold will go up.

In recent weeks, several eastern European countries have started repatriating their gold. Needless to say, the resumption of QE and the easy credit environment facilitated by the central banks has instigated this trend. A lot of stock traders are happy with this (easy credit) and stock prices are rising again and gold/silver have begun to slowly recede but how long can this last?

The economist Paul Krugman is revered by many as an excellent economist and Noble Laureate whereas I would be of the view that he is a nincompoop who does not understand human nature and has a questionable take on what morality is. This is an example of why I think many western institutions, including the Noble Committees will ultimately lose credibility. The award given to Paul Krugman will become an embarrassment.

Bob24

They are struggling to maintain profits while charging borrowers interest rates 3 times higher than in many other European countries (and they have the same access to interst-free ECB money other European banks have).

Goes to show something is wrong in this country.

The J Stands for Jay

Bob24 wrote: »

They are struggling to maintain profits while charging borrowers interest rates 3 times higher than in many other European countries (and they have the same access to interst-free ECB money other European banks have).

Goes to show something is wrong in this country.

They just have an inefficient way of running their business. It seems with the redundancies that they are taking steps to address this

Bob24

McGaggs wrote: »

They just have an inefficient way of running their business. It seems with the redundancies that they are taking steps to address this

Clearly they have a large scope for improving how they operate, but I don’t think this is the main reason for high rates.

If the rate difference was mostly about managing operations better, foreign banks who are able to charge below 1% in other countries would come here and make a killing (they could charge 2% which would be massive margins to their standard and gain them instant market dominance), but they don’t.

The J Stands for Jay

Bob24 wrote: »

Clearly they have a large scope for improving how they operate, but I don’t think this is the main reason for high rates.

If the rate difference was mostly about managing operations better, foreign banks who are able to charge below 1% in other countries would come here and make a killing (they could charge 2% which would be massive margins to their standard and gain them instant market dominance), but they don’t.

In the spirit of the thread, I was lightly trolling. I've always assumed a lot of the rate difference was to do with the increased risk of not having decent security on the loan due to the difficulties in enforcing mortgages in this country

realitykeeper

McGaggs wrote: »

They just have an inefficient way of running their business. It seems with the redundancies that they are taking steps to address this

Irish banks are largely state owned and so they cannot do stuff that is too unpopular like kicking defaulters out of their houses. Besides, if they did that en-masse, a whole lot of properties would come on the market pushing prices down and making it harder for NAMA to make a profit or the NTMA to minimize losses on Anglo. So, instead the defaulters (many of whom made stupid decisions when they bought) are rewarded, the young are punished with high rent and homelessness and eventually the bank offloads the non performing loans to a foreign vulture fund at 70 cent to the euro and the vulture fund which is not state owned has no hesitation going after full payment which should have gone to the taxpayer if only our government was not so cowardly.

Ongoing foolishness can have a cumulative effect. Everything will be grand until it`s not.

silver2020

Bob24 wrote: »

They are struggling to maintain profits while charging borrowers interest rates 3 times higher than in many other European countries (and they have the same access to interst-free ECB money other European banks have).

Goes to show something is wrong in this country.

Be careful how you read the media hype

Mortgages are more expensive here because the risk profile is so much higher. But they are not 3 times EU rates - they are about 1% - 1.2% higher.

If interest rates were 8% in the EU, it would still be 1%-1.2% higher.

As interest rates are so low, the hyper media can claim "double EU rates" - but only when they use the lowest possible EU rate.


In France, you'd be lucky to get a mortgage for over 70% of the building value - hences there is HUGE cushioning for the loan.
Here its 90%, so a 10% house value fall can lead to negative equity.

In France, if you stopped paying your mortgage, you'd be repossessed within 90 days. 120 days max. Very little legal argument.

Here, you could go 10 years of non payment and several high cost legal challenges before repossession - in many cases the legal costs out strip the mortgage value.

Guess who pays? - the other customers.


So, if you want the lower rates of other eu countries, you must be prepared to make changes to the risk/cost profile.

realitykeeper

Bob24 wrote: »

Clearly they have a large scope for improving how they operate, but I don’t think this is the main reason for high rates.

They high rates are to make up for the loss incurred when they sell non performing loans to vulture funds. Ideally, instead of selling the non performing loans, they should do what the vulture funds do and instead of making that difficult by protecting defaulters, the government should protect taxpayers by making eviction an automatic consequence of default.

You are paying high interest so defaulters can live for free, ten years on from the great recession.

Wanderer78

....and at what bloody stage are we gonna address the fact that flooding the planet with cheap credit via normal commercial banks, has wrecked our economies, we can't keep doing this, younger generations are just getting screwed

Bob24

silver2020 wrote: »

Be careful how you read the media hype

Mortgages are more expensive here because the risk profile is so much higher. But they are not 3 times EU rates - they are about 1% - 1.2% higher.

If interest rates were 8% in the EU, it would still be 1%-1.2% higher.

As interest rates are so low, the hyper media can claim "double EU rates" - but only when they use the lowest possible EU rate.


In France, you'd be lucky to get a mortgage for over 70% of the building value - hences there is HUGE cushioning for the loan.
Here its 90%, so a 10% house value fall can lead to negative equity.

In France, if you stopped paying your mortgage, you'd be repossessed within 90 days. 120 days max. Very little legal argument.

Here, you could go 10 years of non payment and several high cost legal challenges before repossession - in many cases the legal costs out strip the mortgage value.

Guess who pays? - the other customers.


So, if you want the lower rates of other eu countries, you must be prepared to make changes to the risk/cost profile.

They are 3 times as high at the moment (but yes of course the markup is fixed and if other EU rates were to double it doesn’t mean Irish rates would double).

AIB standard rate is 3%, you were talking about France and I know several people there with pretty standard mortgages in terms of LTV/duration who have rates of 1% or less while AIB would charge them 3% here with the same figures - a very safe borrower for a short mortgage can even go as low as 0.25% in France, and a very safe short mortgage Irish borrowers will get 2.5% if they are lucky (and on top of that the French rate is fixed for the whole duration of the mortgage). See this French rates comparison website: https://www.meilleurtaux.com/credit-immobilier/barometre-des-taux.html - the only risk profile and duration for which Irish banks are a little over twice as expensive is very high risk over 25 years, for everything else they are 3, 4, 5, or even up to 10 times more expensive in the case of a very safe borrower for 7 years.

But yes, agree the difficulty to get people to pay / repossess and risky lending practices we have here are a big part of the reason for this. And as you said safe borrowers are being charged for unsafe ones (in the French exemple, someone with a lower LTV and shorter mortgage duration will be rewarded with a very significantly lower rate - which we don’t have here).

realitykeeper

Wanderer78 wrote: »

....and at what bloody stage are we gonna address the fact that flooding the planet with cheap credit via normal commercial banks, has wrecked our economies, we can't keep doing this, younger generations are just getting screwed

Yes the central banks have been reflooding western economies with money since the credit crunch in 2008. Obviously this enabled ordinary high street banks to resume fractional reserve lending and reblow the bubble bigger than it was in 2008.

Bob24

Wanderer78 wrote: »

....and at what bloody stage are we gonna address the fact that flooding the planet with cheap credit via normal commercial banks, has wrecked our economies, we can't keep doing this, younger generations are just getting screwed

Problem is that once the mechanism you describe has been triggered and sustained for too long, it is impossible to stop doing it without causing a massive crisis, and no one has the guts to say it publicly.

Prolonged and massive QE as well as low to negative rates were a serious mistake as while they relieved the symptoms of the economic crisis they have now created a never ending spiral of debt and need for cheap money to prevent an implosion of the system.

TheRepentent

Geuze wrote: »

Did you ever consider going to college and studying economics?

And while doing that keep your sh1te posts to conspiracy theories forums?

We can live in hope......

realitykeeper

Bob24 wrote: »

Problem is that once the mechanism you describe has been triggered and sustained for too long, it is impossible to stop doing it without causing a massive crisis, and no one has the guts to say it publicly.

Prolonged and massive QE as well as low to negative rates were a serious mistake as while they relieved the symptoms of the economic crisis they have now created a never ending spiral of debt and need for cheap money to prevent an implosion of the system.

Very true but I think an implosion is inevitable because investors will eventually (I don`t know when) realize what is happening and panic. To placate them, QE will go into overdrive and that will cause hyperinflation. Alternatively, central banks may choose to hold off QE and let the depression happen but history suggests they will go with hyperinflation.

realitykeeper

TheRepentent wrote: »

And while doing that keep your sh1te posts to conspiracy theories forums?

We can live in hope......

You can but I would not recommend it. I`d go with Murphy`s law rather than relying on the luck of the Irish.

Bob24

realitykeeper wrote: »

Very true but I think an implosion is inevitable because investors will eventually (I don`t know when) realize what is happening and panic. To placate them, QE will go into overdrive and that will cause hyperinflation. Alternatively, central banks may choose to hold off QE and let the depression happen but history suggests they will go with hyperinflation.

I tend to thing so as well, but it is hard to say how long it could take. On the one hand i am thinking this has to happen sooner rather than later, but on the other hand Japan started doing it with a 20 years head start and still hasn’t seen such implosion (although of course 30 years of sluggish growth and a large part of the country’s bonds and stocks now being on the balance sheet of BOJ aren’t a testimony of the health of their financial and monetary system).