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Irish Banks vs. French Banks Borrowing Methods

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  • 07-05-2009 1:00pm
    #1
    Zynks
    Registered Users Posts: 1,693 ✭✭✭


    Around four years ago I read an article explaining why French 25 year fixed mortgage rates were as low as the Irish variable rates at the time. The bottom line was that the difference was in the way banks of both countries borrowed the money. As a result of the French approach, the vast majority in that market were on fixed rates for the life of the loan.

    I never put much thought into this though it was obvious that our banks seemed to be lacking a long term view. But now with all the instability going on, and with the worry of the impact that inevitable interest rate increases will have on this market, a bit more of predictability might help, and I feel it might be worth it investigating what are these differences in "borrowing methods".

    Does anyone here have an insight into this matter?


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    #2
    dresden8
    Registered Users Posts: 3,289 ✭✭✭dresden8


    Maybe better suited to economics forum?


  • Options
    #3
    Zynks
    Registered Users Posts: 1,693 ✭✭✭Zynks


    How can I get this transfered to Economics? Would it be better to post a new thread?


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    #4
    oscarBravo
    Technology & Internet Moderators Posts: 28,792 Mod ✭✭✭✭oscarBravo


    Moved from Irish Economy - bounce it back (or somewhere else) if it doesn't fit here.


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    #5
    Hasschu
    Registered Users Posts: 411 ✭✭Hasschu


    Banks have a number of sources where they borrow money. Central banks for overnight money and exceptional cases where the Central Bank provides longer term funds (usually means the borrowing bank is in difficulty. Banks issue treasury bills (term up to one year) or bonds with terms of 2 to 35 years. Every country has a different mix of banks short and long term borrowing. Variable rate borrowing is funded by short term funds and Central Bank funds. Fixed rate borrowing is done to match the terms of a banks lending. If you have $1 Billion of fixed rate 5 year mortgages then that should be covered by issuing bonds with a 5 year duration. If you have $1 Billion of variable rate lending then you issue treasury bills of duration 30 days to 180 days and up to 1 year to cover those obligations. Banks also take into account the fact that people wish to get out of obligations and pay a penalty. France is one of those countries where there is not a lot of churn in the housing market and fixed rate lending is more advantageous to the banks. The reason being if variable rates go up too high and too fast the housing market becomes illiquid and the banks take a bath. The world is made up of people with two mindsets, one where housing is an investment to be bought and sold and the other where a house is a place to live. The former mindset causes churn and the latter stability. Remember when a house in Ireland was a place to live not an asset whose price could be tracked daily.


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