4 ms·

Where is the profit on a 0% loan? Who would pay more than face value for a stream of payments going into the future?

by yuliyp 6y ago

mywittyname 6y ago
Lenders make money on the currency exchange. This doesn't make sense for Americans because they use a single currency for everything, but in Europe, there is a benefit to having a revenue stream in a desirable currency which is appreciating relative to the Euro. To the buyer, the loan looks like 0% because the buyer pays back the loan in Franks or whatever. The bank, meanwhile, gave out a loan of X Euros, and is receiving payments in a currency whose aggregate value is X+Y Euros. Their profit is Y. There's also the opportunity to make even more money selling options backed by these payments. This is a completely valid means of making money, but it carries substantially higher risk than single currency lending. Which is probably the reason most banks don't want to carry too many of these on their balance sheets.
- wrzuteczka 6y ago
  Where is that Y coming from? The rates of say EUR and CHF diverging?
  - gen220 6y ago
    Yes. If CHF outperforms EUR, and the mortgage payments are in CHF, a bank that has most expenses in EUR is making a profit. You can hedge against the performance of CHF by keeping proportional revenue streams of EUR.
    - Chickenosaurus 6y ago
      This theory doesn't make sense to me. Banks could simply buy foreign currency to achieve the same without the additional risk of defaulting lenders.
- poulsbohemian 6y ago
  I'm not sure if / how this is done in Europe, but do these banks presumably also package these loans for sale, where a potential buyer of the note simply wants the recurring income stream for the next 15 or 30 years? That's the basic scheme here in the US anyway.
- zhdc1 6y ago
  I'm having trouble following (maybe it's because I'm thinking in terms of residential loans, and the commercial market works differently or something). If I purchase property in Switzerland with a Euro denominated loan, I have to convert my payments from CHF to EUR. If I'm depositing into a CHF denominated bank account that is owned by the bank I'm borrowing from and they charge me currency exchange fee, ok, but if I'm savvy enough to go with a foreign currency denominated mortgage, I'm also savvy enough to find a cheaper way to convert CHF to EUR. Otherwise I have to take on the onus of arranging the currency exchange myself, in which case the bank I'm borrowing from doesn't have a chance to benefit from the exchange fee. If I'm a European bank and I want to engage in currency speculation, like the other people said below, there's no reason for me to have to go through the administrative hassle of making the loan in the first place.
elindbe3 6y ago
Someone who can only lend at negative real interest rates and/or projects negative market growth.
matwood 6y ago
When bond rates go negative, 0% keeps people neutral.
throw0101a 6y ago
The (government) bonds in Netherlands are negative going out 30Y: * https://ca.investing.com/rates-bonds/netherlands-government-bonds https://ca.investing.com/rates-bonds/netherlands-government-... Commercial bonds may not be too far off, so the spread may be enough for them to make a profit.
ganeshkrishnan 6y ago
The loans are packaged into a company and then traded on the stock market. Your loan repayments are the company's "profits". Bonds are created and then sold to share holders and you may even have a bond with your own mortgage in it. Depending on the class of bond, you get paid more or less (this is the CDO) The profits are from the bonds on the loan in the stock market.

Where is the profit on a 0% loan? Who would pay more than face value for a stream of payments going into the future?

by yuliyp 6y ago

Where is the profit on a 0% loan? Who would pay more than face value for a stream of payments going into the future?

Lenders make money on the currency exchange. This doesn't make sense for Americans because they use a single currency for everything, but in Europe, there is a benefit to having a revenue stream in a desirable currency which is appreciating relative to the Euro. To the buyer, the loan looks like 0% because the buyer pays back the loan in Franks or whatever. The bank, meanwhile, gave out a loan of X Euros, and is receiving payments in a currency whose aggregate value is X+Y Euros. Their profit is Y. There's also the opportunity to make even more money selling options backed by these payments. This is a completely valid means of making money, but it carries substantially higher risk than single currency lending. Which is probably the reason most banks don't want to carry too many of these on their balance sheets.

wrzuteczka 6y ago
Where is that Y coming from? The rates of say EUR and CHF diverging?
- gen220 6y ago
  Yes. If CHF outperforms EUR, and the mortgage payments are in CHF, a bank that has most expenses in EUR is making a profit. You can hedge against the performance of CHF by keeping proportional revenue streams of EUR.
  - Chickenosaurus 6y ago
    This theory doesn't make sense to me. Banks could simply buy foreign currency to achieve the same without the additional risk of defaulting lenders.
poulsbohemian 6y ago
I'm not sure if / how this is done in Europe, but do these banks presumably also package these loans for sale, where a potential buyer of the note simply wants the recurring income stream for the next 15 or 30 years? That's the basic scheme here in the US anyway.
zhdc1 6y ago
I'm having trouble following (maybe it's because I'm thinking in terms of residential loans, and the commercial market works differently or something). If I purchase property in Switzerland with a Euro denominated loan, I have to convert my payments from CHF to EUR. If I'm depositing into a CHF denominated bank account that is owned by the bank I'm borrowing from and they charge me currency exchange fee, ok, but if I'm savvy enough to go with a foreign currency denominated mortgage, I'm also savvy enough to find a cheaper way to convert CHF to EUR. Otherwise I have to take on the onus of arranging the currency exchange myself, in which case the bank I'm borrowing from doesn't have a chance to benefit from the exchange fee. If I'm a European bank and I want to engage in currency speculation, like the other people said below, there's no reason for me to have to go through the administrative hassle of making the loan in the first place.

elindbe3 6y ago

Someone who can only lend at negative real interest rates and/or projects negative market growth.

matwood 6y ago

When bond rates go negative, 0% keeps people neutral.

throw0101a 6y ago

The (government) bonds in Netherlands are negative going out 30Y: * https://ca.investing.com/rates-bonds/netherlands-government-bonds https://ca.investing.com/rates-bonds/netherlands-government-... Commercial bonds may not be too far off, so the spread may be enough for them to make a profit.

ganeshkrishnan 6y ago

The loans are packaged into a company and then traded on the stock market. Your loan repayments are the company's "profits". Bonds are created and then sold to share holders and you may even have a bond with your own mortgage in it. Depending on the class of bond, you get paid more or less (this is the CDO) The profits are from the bonds on the loan in the stock market.