Post by
Torontojay on Mar 27, 2023 11:19am
An interesting perspective on banks
Banks make money by the spread on the short term borrowing rates and what they can charge on its long term loan rates. The Bank of Canada has a current policy rate of 4.5% which is the overnight cost of banks' reserves doing transactions with each other. When short term rates are higher than long term rates then banks are less profitable. Let's explain why:
Banks borrow from each other at 4.5%
The current 5 year fixed mortgage is 5.54% under "special offers"
The spread on that is roughly 1% compared to ~ 3% before the pandemic. The bank takes the hit.
The Bank of Canada policy rate (4.5%) is higher than the 5 year government savings bond which is currently 2.895%. Products offered by banks such as mortgages are tied very closely to the 5 year government bond. In an inflationary environment in which the short term rates exceed the long term rates, banks make less money. It costs them more money to borrow in the short run and they make less of a spread when 5 year government bolds have lower yields than its short term counterparts.
In 2023, Canadian banks will take a hit.
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