Banks find their lending mainly from deposits, not money markets.The swap curve is implying many current rates are nearly loss making at this point.
Hedging costs are different to funding costs. Hedges are required to offset mismatches between asset and funding duration.Banks find their lending mainly from deposits, not money markets.
Deposits and lending rates generally adjust in due course.
Do Irish banks fully hedge for all the maturity transformation they carry out?Hedging costs are different to funding costs. Hedges are required to offset mismatches between asset and funding duration.
Correct me if I am wrong but I didn't think they did.
I asked you the questionCan you point me to a source for this?
Can you point me to a source for this? Asking genuinely, as I'd be very surprised if they didn't otherwise there are many follow through issues. For example charging mortgage holders ERC break costs on a 100% hedge, where a hedge may nit be for 100% of the balance.
It is Group policy to invest its net non-interest bearing liabilities (or free funds) in a portfolio of swaps with an average life of 3.5 years and a maximum life of seven years. This has the effect of helping to mitigate the impact of the interest rate changes on interest income.
The estimated sensitivity of the Group’s net interest income (before tax) to an instantaneous and sustained 1% parallel movement in interest rates: +100bps - c. €275m
Interest rate risk arising on customer lending and term deposit-taking is centralised by way of internal hedging transactions with BoIGM [Global Markets]. This exposure is, in turn, substantially eliminated by BoIGM through external hedges.
Not sure I follow the significance of the spread over 10Y Swap rates and 4Y fixed mortgage (0.25% pa) and the implied profit margin? Haven't funding costs stayed more or less consistent since YE2021 (will likely change today!)?
On an aggregate basis in 2021, BoI's gross yield was 3.04% with a NIM of 1.86%, implying a breakeven rate of 1.18%.
I don't see it that way. Below is how I understand it to work.The idea is to hedge the floating cost of funding? Is this how it roughly works?
BoI receive: 1.9% fixed from customer
BoI pay: 1.65% fixed
BoI receive 1.65% floating
Cost of funding: 0.5%
Gross margin is: (1.9% - 1.65%) + (1.65% - 0.5%)
BOI's deposits are held with the ECB at the overnight rate of c. -0.5%. The delta between the overnight rate and the cost of deposits is the banks 'funding spread'. So deposits are currently costing them 50bps per annum which they pay to the ECB.
I didn't say it was a loss making business, I was asking whether current lending is loss making. Which I think it might be based on the numbers I presented.
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