well, although prob not a nice thing, it is somewhat the case where the long term money cost is less than a percent over spot, so long term this makes sense, onyl thing is that short term spikes could push default levels out and up…
its a close call, but maybe a just one…
ebs won’t lose long term, they can just cut thier profit margin and hedge out thier risk, ok, lowers profits, but they have a lrge interest rate cushion to eat into to pad this downside risk.
How would the EBS hedge the risk of these ‘de-stressed’ mortgages? securitise them and sell them on as mortgage backed securities or covered bonds?. It seems to me that the capacity to lower lending standards is limited by the money markets appetite to buy this toxic sludge debt.
The senior management in these organisations don’t think long term they think performance bonus and fast approaching retirement.
no need for any of that, they can enter into simple mm deals and swaps. Long term money, ie: they can borrow all they want (within reason) at euribor +aprox 1%, for 20 years. They loan at eur base to all the muggins who are stupid enough to touch the most expensive lender in irelans… plus a nice large spread.
So they can buy long term money with short term money, ok it’s a punt on rates rising on the short where they will lose profit,
they rec floating plus say 125 - 145 bps over.
They can borrow 20y at euribor + 100bps. Euribor aprox 14 bps over discount rate offered by ecb.
So worse case they receive their margin of 13 - 33 bps,
Now if customers start finding it hard to repay they can just take the interest rates hit at the cost to thier margin…and this can be hedged off with simle otc derivatives, where they switch defaulting customers to fixed if need be…
My mate was in the small treasury dept in EBS untill recently ,nice handy job with loads of long lunches and corporate hospitality. Must ask him what he thinks of this. EBS probably relying on the fact that higher earners will always be less likely to default and irish people generally don’t default on mortgages even in hard times.
Maybe a slightly different exposure profile. Far more stringent lending criteria, for example, and fewer investors in the newbuilds market, also, a large segment of the market wouldn’t have been arriving at the limit of affordability on historically low interest rates.
that being said, it wasn’t unknown in the 80s, anecdotally, but the extent to which it occurred I couldn’t conjecture.
Yeah plus as a small close knit country the fear of embarresment if one was to default on home loan is strong and the desire to own/hold on to property/land at all costs is high. Things are changing though and many young Irish in large new build estates and apartment blocks would not be as worried about defaulting on large loans with negative equity if their incomes were slashed.
What happens if when they look to switch to fixed the fixed is considerably higher. Apologies I don’t get it. Surely default risk is still default risk unless they get it off their books now. Switching customers to fixed when rates are higher mightn’t do any good as the fixed rates will/might be higher? I know 20 year rates are not much higher but could the whole curve not shift upwards?
You don’t profit but you do have a charge on Dec’s property and you can pursue him for any mortgage arrears. I believe that Baby_tooth is suggesting that if a mortgage customer is finding it difficult paying the balloon rate (the rate that becomes payable after the low introductory teaser rate ends) then EBS can afford to offer the mortgage holder a lower rate(maybe fixed) and the risk/loss associated with this happening can be offset by hedging using a derivatives product a type of loss insurance for Banks and the money markets.
It may give an insight to the fact that the regulator feels exposed and if it all goes to wall in next 18 months then doesnt want to lose job which would have to if allowed 1% stress test and rates went over this.
For me its an indicator those who make “everythings ok” noises in public re Irish banks may in fact be alot more worried in the background.
PS Used to like EBS but average board salary packages over 500k are a bit ridiculous and EBS is now run for benefit of staff not customer
Also I would say NIB tracker offer is hammering EBS as alot of EBS customers would have lower LTVs