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I don't think this duplicates Why do banks give small APR loans, because I'm asking HK, and APR = 3% here not $4%.

I screenshot picture beneath from HSBC HK. Scroll down a quarter of the way, and click on 'Rates' to download that PDF. I ask just about the last line on loans under red horizontal line.

enter image description here

Canadian ETFs with MERs < 0.15% like XUS (iShares Core S&P 500 Index ETF) can probably outstrip an APR of 6%.

  1. Thus why would a wealthy bank loan at APRs < 6%?

  2. Conversely, why don't they charge more than 6%? Why not charge the opportunity cost of loaning, that is, the APR gained from investing in a relatively safe ETF like XSP?

Furthermore, HSBC HK probably has PhDs in math like James Simons who can invest in alternative investments that can yield a higher rate of return for the same risk.

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The sort answer is because the banks create money through lending, and bank lending is fundamental to a prosperous economy. They are not allowed to create money to invest in equities or ETFs. Investment banking is funded by a bank's funds available for investing.

Perhaps because we have lived through a decade of quantitative easing by the central banks, younger generations are under the impression that it is the central banks that create money. Well they do to some extent, but the vast majority of money creation is brought about through bank lending.

A quick internet search finds this summary of the current state of affairs, which includes the following description :

How is money created? Some is created by the state, but usually in a financial emergency. For instance, the crash gave rise to quantitative easing – money pumped directly into the economy by the government. The vast majority of money (97%) comes into being when a commercial bank extends a loan. Meanwhile, 27% of bank lending goes to other financial corporations; 50% to mortgages (mainly on existing residential property); 8% to high-cost credit (including overdrafts and credit cards); and just 15% to non-financial corporates, that is, the productive economy.

not-nick
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  • Fractional banking? – RonJohn Nov 17 '19 at 23:52
  • @RonJohn Yes, one aspect of factional reserve banking relates to lending. I believe that currently, for each $10 of reserves, banks can create about $90 through lending. Nice job if you can get it. – not-nick Nov 18 '19 at 02:30
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    The answer is skipping the simple fact that they are not doing it because of regulations. They are simply not ALLOWED to do it. Investment and borrowing side are not allowed to intermingle in the USA these days, not primarily because of "history" or "business" but because of LAW. – TomTom Nov 18 '19 at 14:53
  • @TomTom Hi, In Canada, to which the question is related, banks can and do have in-house proprietary traders who trade on the bank's account. Obviously such trading is fully segregated from clients accounts and various rules apply. The same is true in the UK if my memory serves me well. – not-nick Nov 18 '19 at 17:36
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    The point here is fully segregated. So, you can not just take the funds and invest them in ETF. You CAN use part of YOUR capital (as bank) to possibly run that in a trading desk under EXTREMELY good risk management to make sure it does not spill over, but that "is it". – TomTom Nov 18 '19 at 18:08
  • Banks are businesses. Why do people deploy capital through banking rather than investing some other way, that is the question. The answer is that there is much more profit occurring through JP Morgan's banking operations than a 3% muni-eft, why? – quid Nov 18 '19 at 18:11
  • @TomTom Yes, that is the point I make in my answer when I say "is funded by a bank's funds available for investing". – not-nick Nov 18 '19 at 19:33
  • @quid I'm not sure I understand the point you are making here. The lending made by banks is geared at about 9-to-1, i.e., for $10 of reserves they can generate income on $100 lent. So lending is certainly profitable. Is this what you are asking? – not-nick Nov 18 '19 at 19:37
  • That's what the question you answered is asking. – quid Nov 18 '19 at 19:52
  • @TomTom Yes you are correct, and that is the answer that I would have given, that it is not allowed by regulation, i.e. by law, well, not in the United States. The question is tagged Hong Kong however (not Canada) so I have no idea what restrictions there are there, what laws, nor even how they differ in the present from the pre1999 past which would have presumably been closer to Canada. (I don't even know if that is true anymore.) – Ellie Kesselman Nov 24 '19 at 15:58
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    @EllieKesselman Hi, Yes the question tag does include Hong Kong, however the products referred to are Canadian ETFs and HSBC is a British bank with international reach, so I had assumed that he was referring to HSBC Canada, perhaps mistaken in believing HSBC is an HK bank.. – not-nick Nov 24 '19 at 16:14
  • @Nick Ah, okay, now I understand why you mentioned Canada! Thank you. – Ellie Kesselman Nov 24 '19 at 17:26
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Because of risk.

A norma lbank is in the credit business - it is VERY controlled in what risk it can take these days. Investing in Stock ETF is jsut not compatbile with the risk profile a bank (which is EXTREMELY highly leveraged) can take.

TomTom
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Take a simple example of a bank that is able to led 5x its deposits to lend as standard home mortgages (leverage is much more complex than this in modern banks but does fine for a toy example).

Assuming they pay 1% on these deposits and loan out at 3% and no one defaults. For every $100 deposited the bank makes:

-$1 in interest paid to the depositors ($100 * 0.01)

+$15 in interest from the mortgage buyers (($100*5) * 0.03)

For a total return of $14 on the $100 in deposits they had to hold, or 14%, at a much lower risk profile* than a standard stock ETF. As a result of the leverage structure they are making a lot more than just the headline interest rate on their capital.

*supposedly/usually/lol who cares the public will pay if our models are wrong anyway

Philip
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  • You may have a mistake: it's not 5x deposits, but 5x reserves. When a bank issues a mortgage this creates both mortgages and deposits at the same time, so mortgages < deposits (until the money is transferred away to another bank, and the reserves with it, and then the bank had better still have the needed reserve ratio) – user253751 Jul 13 '22 at 11:24
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  1. Thus why would a wealthy bank loan at APRs < 6%?

Because it is lending almost none of its own money. Banks lend the money that's on deposit based on a "reserve" formula. Depositors deposit $100, the bank lends $900.

  1. Conversely, why don't they charge more than 6%? Why not charge the opportunity cost of loaning, that is, the APR gained from investing in a relatively safe ETF like XSP?

Competition from other banks. I can't effectively lend money at 10% if someone else is lending at 6%.

quid
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