Monday, November 14, 2011

Playing with fire

Banks are supposed to do an honest business by taking money from depositors and lending them to businesses at a higher interest rate and to make profits from the spread in interest rate, less the operating expenses. To make profit, they have to work hard, provide good service to their customers, work efficiently and earn an honest profit.

But, the banks found an easier way to make super profits. During an economic slowdown, when savers are risk averse and accept negligible interest rate, the banks used the money to speculate in all types of asset classes - housing, forex and government debts. It seemed so easy to make money, especially on government debt which was considered to be "safe". They can make a good margin on lending money to the government to earn a high interest rate - better than the money lent to businesses.

But,governments can become insolvent. We now have a situation where the government of several European countries are not able to repay their debts and found it difficult to refinance their short term borrowings. This is the crisis in Greece and possibly Italy. When these governments cannot repay their debts, the European banks that bought their debts get into financial difficulty, causing a potential banking crisis.

http://financialedge.investopedia.com/financial-edge/1111/How-PIIGS-Defaults-Could-Affect-The-Markets.aspx?partner=ntu11#ixzz1dFm08zM8DISCLAIMER:

Banks should be required to go back to their traditional business of handling payments and giving loans to small businesses. They should not be speculators in asset classes, including government debts. These asset classes should be invested by mutual funds.




7 comments:

Anonymous said...

So are our banks safe? Especially those foreign banks in Singapore where they are licenced to accept savings and FDs?

And some of them pay better interest rates than local banks so maybe a lot more people put most of their money in these banks to earn the better interest.

Anonymous said...

"Banks are supposed to do an honest business by taking money from depositors and lending them to businesses at a higher interest rate ..."

Singaporean taxpayers used to own such a bank called POSBank.

It was sold (how was the value calculated again?) to DBS Bank.

The same DBS Bank who introduced all these new innovative financial products to Singaporeans.

What to do?
It's happened.
Let's move on.
It cannot be helped.
Really ...?

financialray said...

Human greed knows no limit. The Chinese say human greed is akin to a snake longing to swallow an elephant.
Well, when the banks make a lot of money, the CEOs and top brass get good pay and the country's economy flourishes, so the politicians allow capitalism to rein.
Now they say it is time to lock the barn after the horse has bolted. Well, we still need the financial system but how the CEOs and investment arms are rewarded for their risk behaviour MUST be scrutinised.
Along the same vein, our ministers' salary should be reined in. Give them a good retirement package with good health insurance, good nursing home care, free SBS/MRT transport so that they make sure all these systems still function when it is time for them to retire. We do not want ministers to make their millions NOW and then when our economy falters many years later, these ministers already migrated for their own "personal" reasons. Our founding fathers have made sure Singapore propser but we cannot be sure of future generation of ministers.

Anonymous said...

Even the insurance companies are lying to consumers that their limited pay or anticipated endowment are giving better than the banks. it seems they both are playing the shield and spear game to cheat the consumers.The salesmen have no conscience at all. They should disclose to their customers if they are really caring and sincere about their financial well being but insurance salesmen only want make commission at their expense. I hope whatever commission they earned from this ruse they can enjoy it in hell asap.
It seems life insurance job has been become a cursed job when it is supposed to a noble one. Day and night these salesmen are being cursed.Wonder with the money they robbed their customers will they be happy?

G C said...

Dear Mr. Tan,

I am 100% agreed on what your comments on the financial institutions of today. They have made super profit and most of their margin was from giving out much lower interest rate to deposits as compare to interest rate they charged on loans.

One very good example was hire purchase loan on the purchase of motor vehicles. What the consumers did not realize was the effective high interest rate eg. say the banker quote the rate at 2% but if the HP period is over 5 years then the rate is calculate at 5 x 2%= 10% pa. This rate is usually much much higher then the deposit rates.

On top of the differentiate on the interest rates the bankers also imposed various charges and exorbitant penalties scuh on late payment on credit cards balance, up front charges on credit card cash advances.

I am totally agreed with your view that the bankers should go back to olden days where they put the consumers interest first and not profit first. It is time for the world to work up a more equitable financial system

Anonymous said...

How do the FIs make money if they do honest business?
If you read a posting in the govt feedback unit called REACH it says about LIA (life insurance association) not disclosing full details but only selective details. Why? if the industry association is covering up something what is expected of its member insurance companies? It is telling half truths.
Sad , right? Their existence is dependent on consumers yet they rob the consumers under their noses.

yujuan said...

DBS used to be a Bank with a conscience many many years ago. But the character changed after they decided to employ foreign CEOS who are more interested in padding the bottom line of DBS, and thus their pockets, and made wild acquisitions at very high prices abroad, got burnt, and turn to other ways of making money, instead of the traditional way.
Never trust DBS, esp their relationship managers, they have a quota to meet, and will play you out just to fulfill that quota.
Think never trust any FI here in Singapore, they are well protected by the MAS, through those misleading deceitful documents to sign. The Judges here say you are liable even if you are illiterate.
LKY said you are liable if you close your eyes while signing.

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