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I'm curious why this hasn't been competed away. Short-term rates in Denmark are -0.6%. Couldn't banks just borrow short, write mortgages at 0% and pocket 60 bas
by dcolkitt 6y ago
I'm curious why this hasn't been competed away. Short-term rates in Denmark are -0.6%. Couldn't banks just borrow short, write mortgages at 0% and pocket 60 basis points?
It's a little screwy, because you're getting paid the lenders instead of the borrowers. But it's still fundamentally no different than a bank that borrows at 2.5% and writes mortgages at 3% APR.
- im3w1l 6y agoIt's very different, because it means you don't need the borrower to ever pay back. Meaning the banks will give loans to anyone the laws can be bent to allow lending to.
- eloff 6y agoThat doesn't make logical sense to me. The back would still lose the principal if you defaulted right? Doesn't matter the interest rate.
- im3w1l 6y agoThe customer can't default if there is no interest, so just let the debt remain on the books forever. Well, I suppose you could take a loss if your customer dies, and the estate is insolvent.
- eloff 6y agoIf you're not making the monthly payments then that's still a default. I don't see how the interest changes anything. I guess you could argue if the bank is not paying interest on that money, then they won't lose anything if the client is in default. I think there's probably still opportunity costs to the bank in that case - they could be loaning that money to a client that pays additional fees and makes the payments on time. But I imagine they would still foreclose and sell the asset to recover the principal in that case. Which might turn a profit for them.
- wcoenen 6y agoThere are two types of rates that are negative: the central bank deposit rate, and the government bond rate. Neither means that commercial banks can borrow at negative rates.