Thanks for all the replies. I'm still not 100% clear though. Do you mind elaborating a bit?Banks borrow short term and lend long term.
Short term rates are a lot more volatile than longer terms rates.
Irish banks are seen as risky hence they need to pay more than other European banks to borrow money.
3 month EURIBOR is the benchmark rate that banks lend to each other, this is 0.9%. Due to their perceived riskiness, Irish banks need to pay a margin over this to secure finance, let's say 0.5%. Therefore they are borrowing at 1.4%.
Some trackers are ECB + 0.5% i.e the bank is lending at 1.5%.
So lending at 1.5% but borrowing at 1.4% = a margin of 0.1%.
Can any business make money on that margin?
Above is all very simplified but hopefully sheds some light on why banks are losing out on trackers.
On variable rates, the banks can pass the risk margin they are being charged by the other banks onto the customer by increasing the variable rate. They cannot do this on a tracker or fixed rate.
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Say I borrow, to use one of the other poster's examples, €400,000 and agree to pay it back with interest over 25 years. The bank borrows this from another bank and agrees to pay it back say over 5 years (is 5 years considered short-term for an inter-bank loan?). How does the bank propose to pay off it's short-term loan if I'm paying them off in the long term? Where is this money supposed to come from? Is it just through their deposit base?
Thanks for all the replies. I'm still not 100% clear though. Do you mind elaborating a bit?
You say banks borrow short-term and lend long-term.
Leave aside credit crunches and bubbles bursting and recessions for the moment and imagine everything is rosy for the banks.
Say I borrow, to use one of the other poster's examples, €400,000 and agree to pay it back with interest over 25 years. The bank borrows this from another bank and agrees to pay it back say over 5 years (is 5 years considered short-term for an inter-bank loan?). How does the bank propose to pay off it's short-term loan if I'm paying them off in the long term? Where is this money supposed to come from? Is it just through their deposit base?
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