Resi interest rates

I have a feeling there is some change coming in terms of interest rate spreads...

I rekon banks are going to focus divert lending towards business, including commercial prop, and thus reduce spreads on those loans while increasing spreads on residential loans ...

If this eventuates in conjunction with increased rates from RBA we may see a 2 speed market again .. and a dip in certain FHO areas..

Its all just opinion , not much basis. Whats the view here ?
 
i can't see comm lending opening up unless they get leaned on by the govt.

however, if you ARE right - well, i'll be loking to sink my cash into comm property.

trouble is, why would someone set up shop if they can't get employees?
 
I have a feeling there is some change coming in terms of interest rate spreads...

Are you working in the Banking and Fin. industry or is this a gut feeling?

I rekon banks are going to focus divert lending towards business, including commercial prop, and thus reduce spreads on those loans while increasing spreads on residential loans ...

Would this mean the risk management teams in banks are looking to change there long standing view (correct me if I am wrong that it is a long standing view) that Com lending is "riskier" than resi lending and therefore demands a premium in spreads. In my point of view banks basically would have to believe com lending is more secure and dependable than resi lending before changing the spreads for com lending to be less than resi lending. In my opinion I don't see this happening.

If this eventuates in conjunction with increased rates from RBA we may see a 2 speed market again .. and a dip in certain FHO areas..

I believe if RBA raises rates the banks will stick to their risk assessments and increase resi spreads possibly if they deem risk of default to be greater along with raising commercial spreads as well if the risk of default increases .

Its all just opinion , not much basis. Whats the view here ?

I think small business will need to get creative in finding non bank funding if rates rise above their means. It is my belief/opinion/understanding that banks calculate spreads on risk. commercial lending from what I understand equal greater risk to banks than resi lending. Therefore commercial will always pay greater spreads as long as banks believe that commercial lending poses a greater risk of default than does resi lending.
 
the govt could easily redistribute resources within this economy if they changed the capital adequacy rules for business lending vs resi lending. could be a real possibility? would cool the housing market and boost investment in productive activity in one fell swoop

I reckon labor was too soft on the banks during the GFC. they should have been forced to issue 20% of their shareholder value to the future fund in exchange for thsi big brother protection. now we have the bizzare situation of a govt supported monopoly with no govt ownership. there has been a massive transfer of weatlh from the populice to those who owned bank shares
 
its more a gut feel than anything.. based on reading between the lines of what Glenn Stevens comments were and also comments by some bank CEOs and their recent actions this year..

btw i DIDNT mean if RBA rates are 4.5% then resi loans will be 8% and business loans will be 7% ...

what i meant was in the past half year or so resi mortgage rates have gone up LESS than business loans , the banks have been building up their resi loan books.. however i think going forward this will change... meaning if we get a 0.25 rise by the RBA then busines sloans may go up .25 but resi will go up .35 (note: this is just an example to illustrate the point) ...
 
its more a gut feel than anything.. based on reading between the lines of what Glenn Stevens comments were and also comments by some bank CEOs and their recent actions this year..

I don't hold much value in what the RBA PR machine says. In my opinion their only function outside of transaction management for Australia is set to an arbitrary I.R that dictates the cost of the AU dollar against foreign currency/treasuries. I don't see a big correlation between RBA policy and the cost of private equity. As for CEO's when ever I see an interview they seem to talk a lot without saying much. If you have an example of them giving concrete evidence of their intentions I love to hear it, as I have missed it and would like to know what goes on in their heads.

btw i DIDNT mean if RBA rates are 4.5% then resi loans will be 8% and business loans will be 7% ...

what i meant was in the past half year or so resi mortgage rates have gone up LESS than business loans , the banks have been building up their resi loan books.. however i think going forward this will change... meaning if we get a 0.25 rise by the RBA then business sloans may go up .25 but resi will go up .35 (note: this is just an example to illustrate the point) ...

I have diverted all my limited brain power to find an answer to this question, so far I have hit a brick wall when investigating what would be the likely direction banks would take in re-assessing their risk management. What I have found is that the banks have a lot less control than I thought about what risks they can take. To my understanding a large part of their decisions is based on what direction APRA takes in interpreting and legislating "policy" changes according to the Basel II framework.

From my understanding Basel II framework dictates what is acceptable measurement of risk within the Banking and Finance industry. APRA then tries to fit the framework as best it can into a policy/legislation for the Australian B&F industry. The banks then set their risk measurement and lending policy against what is legally acceptable by APRA policy/legislation to milk the market for as much as possible and look after the shareholders "best" interests, I have no idea what internal process go on in the bank to dictate resi rates = X commercial = Y, but looking at CBA's loan offerings and guessing other banks are similar it isn't a simple a proposition as resi = x com = y, it all comes down to the quality of the collateral (as deemed by APRA/Basel II) which the banks can then play with to make $1=$+10.

As far as I have looked APRA is currently in the process of drafting/reviewing/tweaking their implementation of Basel II... which will most likely lead to amendments some time after mid year 2010. What the changes may be, I have no idea as yet sorry :p . Banks will then (I suppose) adjust their lending to reflect what is in their best interests and still keep them in line with any changes in legislation.

At the moment as far as I can tell resi home loans with LVR 80% or less are golden and are ticket to print $$, resi home loans with LVR above 80% are a good enough second, everything else is second rate and carries a risk premium for banks to hold. Up until this changes through APRA/Basel II "reform" I don't see huge changes in spreads, if anything I think banks will only increase the spreads as they chase more resi loans for their books with ever more limited offshore equity edging out local commercial lending more and more.

As a disclaimer please take the above as my opinion, as I have NFI idea if the above is correct, it's just my limited understand of the Banking system.

Edited to fix some errors :p

Ok just to show how much leverage banks can get from 80% lvr standard loan or a 60% lvr non standard loan. Apparently according to what I have read from googled pdf's and from the APRA site banks only have to hold as capital 4% of the value of the loan as security to meet legislative capital requirements. If the loan is above 80% lvr and insured by LMI then the banks have to hold a whopping... 8% of the value of the loan on their books as capital. I think what some of the changes APRA are looking to introduce is to increase capital requirements to .... 8% of value across the board, but I am not sure as I lost track of what I was reading :p . I fear some of the above I wrote was BS, but it just goes to show it pays to be the banker :p .
 
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its more a gut feel than anything.. based on reading between the lines of what Glenn Stevens comments were and also comments by some bank CEOs and their recent actions this year..

btw i DIDNT mean if RBA rates are 4.5% then resi loans will be 8% and business loans will be 7% ...

what i meant was in the past half year or so resi mortgage rates have gone up LESS than business loans , the banks have been building up their resi loan books.. however i think going forward this will change... meaning if we get a 0.25 rise by the RBA then busines sloans may go up .25 but resi will go up .35 (note: this is just an example to illustrate the point) ...

we've seen examples of this already - however, as the extra over IR hikes have had a further dampening effect, official cash rate rises are not needed as much, and the RBA recognise this.

so while it MAY be true, it may not come to fruition.
 
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