Are Canadian banks gouging consumers & businesses?
For the last decade, the spread between Bank Rate (top end of the Bank of Canada operating band) and the Prime Rate (the rate banks charge their best customers and the rate used as benchmark for almost all loans except fixed rate mortgage) has been about 150 basis points (bp) or 1.5% but since Dec 2008, the spread has increased to 175 bp or 1.75% – see chart below. Prime Rate affects almost all business loans, line of credit (personal, secured, HELOC, etc) and variable rate mortgages.
Source: Bank of Canada
What determines this spread and why is it still at decade highs when the Big Five Canadian banks have hit record profits in Q1/Q2 2010?
My guess is that they charge more to spread out the risk of selling less loans. This conservative approach will often lead to more loans than forecasted resulting in greater profits. It is a risk to charge more (higher rates), but one that often pays off for big banks.
There is no risk in selling less loans… just less sales. But the spread on each loan is higher which increases the gross profit margin… i’ll be posting a long term chart of the prime rate vs bank rate spread soon… historically the spread is pretty low but high compared to the latter half of last century
Yes, they charge more to spread the risk of selling less loans; thus resulting in less sales. But with the high credit on each loan, the gross profit margin is more.
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