Joules MM1 kindly sent me the following response as a PM on 28th December 2006, and said it would be OK if I shared it with other T2W members. Here it is:
Originally Posted by Joules MM1
Where I am, a typical thing, used to be, to take your cash and pay you 3% p.a and then on-lend that same amount at a premium rate to someone else.......5% for example...... after costs the bank sat on the diff......these days the banks go to the capital markets for loan packages..... the markets are awash with cheap credit looking for a home.....the banks take the loan packages and separate them, then, on-sell to the public with add-ons which were originally part of the package that the bank loaned itself........the idea for many private banks is to pay a premium interest to have retail clout, a part of doing business, to attract kudos, goodwill....there's no real value in how the "you loan to me, I loan to them" deal works anymore but there is real value in the perception and the long-range debt (how the banks keep you and earn from fees) is still part of the same mortgage (engaged till death) strategy....the strategy is different today because the capital markets (globally) lend differently........more lenders are private adn are willing to take thinner slice or the earnings pie.....this also means attracting more customers through higher interest payments....less income but a larger share of the customer base........which is also another reason that globally a credit expansion continues to balloon......you know an infamous banking group wants to reinvent a christmas tale and call it Ebervisa scrooge......
the banks interest settings follow loan demand and interest rate demand.....watch the short and longterm rates swing in the US and you'll soon know what the US fed is about to do.....the banks are in that squeaz with their central issuers and the customers.....
.......everything is considered negotiable.....if you've got a BIG stash and you want a decent interest earnings then a bank will negotiate......money talks.....and same at the other end....you can negotiate the interest repayments regardless of what the central banks say......how does that saying go......you owe the bank a million and your in trouble......you owe the bank a billion and the banks in trouble........
banks clearly have to be more inventive today to squeaz retail value.....as arbitrage and cross-currencies are not my area there maybe someone who can shed light on other mechanisms that aid in interest activity related to this question......
julian
