June 04, 2012

All bank spreads are not alike

Sir, Michael Mackenzie, Ajay Makan and Nicole Bullock write that the spread on US consumer mortgages has widen over the last year when compared to that of Treasuries, “Mortgage rates fillip for banks”, June 4. 

Unfortunately, their analysis is flawed as it fails to take into account that all spreads are not alike, as to earn some require the bank to hold more capital than to earn others, and so in fact the complete opposite conclusion could be the valid one. 

In these days of scarce bank capital, had they run the figures on that which most generate capital requirements for the banks, namely the lending to the “risky” small businesses and entrepreneurs then they would have seen what borrowers are really hurting the most.