This article originates from the need to prepare the next fixed-rate interest rate period of a long-term loan. This led me to calculate some basic bank profitability rates. And then, could criticism of the financial system have consequences when setting a new fixed-interest period?
It's time to contact my bank and discuss the next fixed-rate term for my long-term loan. This is the first and only loan that I have ever taken, and out of principle it should be my last one, too. Personally I feel that loans "bind" you to things, make you feel burdened, and make you be dependent. Some might even go so far as to say that loans are tools to enslave you to the "system". The term Indenture comes to mind.
The last time when I renewed it, early 2008, the financial crisis was looming and I knew for sure that interest rates were on their way down to the cellar - but it hadn't happened yet. The interest rate the bank offered for an interim half or one year loan was sky high, so no sense in trying short-term bridging until the rates came down. There was nothing I could do.
I ended up with fixed 5.16% real interest rate for 5 years! Within five to four months, the crisis took hold and two things happened. Unexpectedly our business revenues caved in and shortly after, as expected, interest rates plummeted.
Firstly, for us, plus millions of others, the disaster led to real financial hardship. We counted every penny spent, quit buying things, and kept the car chained in the carport. You'll recall that the price of both food and gasoline suddenly sky-rocketed. I suspect that there were no real increases in costs, but the super high prices reflected "big money" moving its investments into the "safe havens" of food-based commodities and oil.
Secondly, this particular bank made a superb profit on my loan. While I pay an interest rate of 5.16, current real interest rates for same type loans have fallen to as low as around 2%. So, part of the 5.6 Billion USD profit that the bank made comes from me. The other part from a lot of other people like me, that is its customers in "Consumer Banking". Consumer Banking income before income taxes (IBIT), that is profit in 2011 was 50% higher than in 2010. A staggering sudden increase. That profit increase alone was roughly 1.2 Billion USD. In fact, this bank's pure profit ratio (= income/revenues) for consumer banking was a staggering 17% in 2011. Could high fixed rate loans during times of plummeting interest rates have anything to do with it?
Let's also not forget that the entire debacle was caused by the financial and banking system itself. And then it has been making money from it through its customers.
By the way, when you analyse financial statements or even external reports about the performance of large corporations, especially in the financial sector, they almost never state the actual profit rate. What is highlighted is the absolute figures for revenue and income, the profitability change compared with an earlier quarter or year, figures like Return on Equity (RoE), etc.
But there's never a statement like. "Company X profit rate in 2011 was 17%". Not quite sure why these kinds of statements are so much avoided. Because it's too easy to calculate yourself?
But now to the reason for this article. It's a bit ironic that I've been criticising the greedy financial system, while at the same time I now need to set my next 5 years interest rate with the bank, a component of that system.
It makes you think. Some may find it difficult to voice an opinion in view of such dependencies.