Government first needs to set an overall policy - either contractionary or expansionary.

In this case, expansionary - they want to loosen the purse, get people to borrow. They would like to have 2 effects occur:
(a) Higher amount of loanable funds
(b) Lower cost of borrowing

The SRR works on the amount of loanable funds. It permits each bank to have more funds available for lending.
However, banks can (and currently do) counteract against this by allocating more funds to Tier 1 and Tier 2 capital.
Very importantly, banks are hoarding (perhaps, I should use a softer word) capital to cover the expected losses from the higher NPL levels.

The OPR works on the cost of borrowing. In theory, lower OPR translates to lower borrowing costs.
Again, banks can (and currently do) counteract against this by not passing on all the OPR reduction to the consumer.

So, if I am a banker, I will tighten the purse (restrict the amount of funds available for lending), and make sure I don't transfer all OPR cost savings to the consumer (hey, I want to earn high margins!).

This post has been edited by Playbook: Jan 22 2009, 02:07 PM


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That would work IF all the banks made the same pact. If one major bank decide to go against the flow then the whole arrangement would crumble and banks would be forced to resume lending as BAU else no one will go to them for loans.

Right?

today news, one of the local bank announced new blr rate 5.95%

That's Maybank, right?
Other bank no announcement one? But their FD Rate already down...

there will be more announcements in the coming week.

They always try to squeeze more profit out of customers.

OPR drop, FD rate immediately being dropped, then for BLR, delay and delay for weeks before only decide to drop. In between this days and weeks, banks will make extra few millions or ten of million out of it.

think its cos theres alot more planning and calculations involved in lowering BLR then FD rates, once they announce they cant pull back, not without embarassing themselves anyway..they lower too much..make loss...lower too little, not competitive with other banks

also have to take into account all thier existing loans on floating blr...thats affected as well

Not surprising... predictably, Maybank is government-linked, definitely would have to follow government policy.

After Maybank, BNM would use that to pressure other banks to lower down their BLR also.

Actually mebbe this 55bp cut by Maybank was something that they have work out with BNM.

Explains why BNM went for 75bp cut VS the widely anticipated 50bp cut.

The deep cut is a very different picture painted by BNM as compared to our Finance Minister's statement.

It means that our GDP is stalling or shrinking.

As for those offering higher FD Rate, it means that those Banks need more cash.

Not necessarily so. The answer lies in a few areas, including Adverse Selection.

CETERIS PARIBUS (because other factors play a role), Lower rates by one bank may drive business to it. But borrower quality is likely to be poorer compared to the banks which retain higher rates. Higher rates, imply a pool of higher borrower quality (as borrowers would generally have to be more confident to take on loans with higher repayment rates. Lower rates, imply a pool of lower borrower quality (as more low quality borrowers would enter the pool, so default rates would go up).
[This is all part of Stiglitz's Adverse Selection problem, classically applied to lemons in the sale of used cars]

Thus, that bank that bucked the trend, setting rates lower than all the rest, would have high loan growth but higher default rates.

And we all know what happens when rates drop downwards to zero. It's exactly what got us in this crisis in the first place I shouldn't smile, but economists worldwide, are smiling looking at how economic cycles repeat itself.

Rewind ourselves a few years back, about 6-7 years back. The dotcom cycle had just ended, the bust was in place. Alan Greenspan lowered rates to stimulate the economy. However, rates were kept too low for far too long, thus precipating easy credit and (inevitably) higher default rates. With low enough rates, home purchases went up! Everyone wanted to buy a house! Over 60% of the household population became homeowners (Historically, whenever home ownership exceeds 60% in the US, it coincides with a crash, leading to the controversial statement that home ownership should be capped around 60% - i.e. the government's goal should not be to promote 100% home ownership - some people are meant to just rent... but that's another story).

That's why, economists perceive that rates should have been hiked at least 2 years back to address the high economic growth at that time. But governments failed to do so, held in sway as they were by the profits generated by businesses. Now, they are forced to lower the rates, but this will create the seeds of the next crash.

Disagree... if a bank can cooperate with a regulator to determine future rates, that would lend unfair advantage to it over other banks. Surely controversial.

This is Malaysia.............anything can happen boss

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Added on January 25, 2009, 10:40 amI respectfully disagree with this view. It does not matter how much money you have or how massive is one's net worth. Everyone wants to pay less interest to banks, it has got nothing to do with their borrowing quality


This post has been edited by Pai: Jan 25 2009, 10:40 AM

Er, Mr. Playbook.......you haven't taken a housing loan before, have you? If u have b4 - did u go for a bank that intentionally charged you more? As I believe u are a borrower of "higher quality"?

DO NOT CONFUSE yourself with low rates being the main impetus that caused the subprime bubble. That view itself is very misleading. Rates were only one of the many factors which encouraged reckless borrowing and lending in the US....certainly not the main factor.

The subprime problem was mainly caused by EASY CREDIT MADE AVAILABLE. e.g. Alt-A loans which required NO DOCUMENTATION from borrowers. Or exotic packages like "pick a payment option" or "payment holidays".

Essentially, this whole problem started because Mr. Joe had 1,000 bucks in income - but the friggin bank INSISTED that he was earning 2,000 bucks. Adding fuel to fire, Mr. Joe had tons of payment options, plus no documentation is required. Rates were only one of the factors, all right?

Sorry - I like to present issues in a very simple to understand context. If you'd prefer - I can attempt to throw in some Maynard Keynes vocab the next round.

This post has been edited by Phoeni_142: Jan 25 2009, 11:05 AM

Thought we have 75 basis points reduction? Shouldn'T that be 5.75% instead of 5.95%?

OPR reduction doesnt always equate to BLR reduction

BLR depends on Bank's cost of funds. That is why AmBank's BLR at 6.55% the last time BLR @ 6.50%.

Some Bank's BLR is higher, and ideally they will just follows MayBank and CIMB to stay competitive.

as of now there's only 1 bank adjusted their BLR to 5.75%

some local ones has announced BLR at 5.95% starting on the 3rd Feb...

the rest still no news...




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Mortgage Sales Executive
OCBC Bank (M) Bhd
019 - 913 1127
ChuaCChie@OCBC.com
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getting the lowest possible loan rate is not the objective of 100% of ppl applying for loans. There are other factors like trust in the bank, ease of transactions, or simply cos that bank has pretty loan officers..

take citibank for example, most of thier home loans are at BLR or even +1 or +1.5% vs Eon/CIMB at BLR - 2+