UK Finance (interest rates)

KCB1998

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That’s actually not correct. Merc are their own bank so not subjected to borrowing money like Porsche does from BOE so not affected by high borrowing rates. As such they can set their own rate independently.
You don't think Merc borrow money from the markets? All Banks do.
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You don't think Merc borrow money from the markets? All Banks do.
I’m sure they do. But what I do know is that’s not their business model here in the uk. That’s not me guessing a possible business model, it’s from the horses mouth so to speak.
 

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That’s actually not correct. Merc are their own bank so not subjected to borrowing money like Porsche does from BOE so not affected by high borrowing rates. As such they can set their own rate independently.
Porsche, well VW anyway, does have a bank / banking license.....
 

Sebbo

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Porsche, well VW anyway, does have a bank / banking license.....
I’m sure they do, but they borrow from the BOE to fund the finance we take out with them. That’s all I know. I’m not privy to their complete banking structure.
 

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I’m sure they do, but they borrow from the BOE to fund the finance we take out with them. That’s all I know. I’m not privy to their complete banking structure.
Not sure that's right. Central Banks are generally lender (short term cash) of last resort to the banking system / provide liquidity if need be to the system. They aren't there to lend cash to banks (and certainly not to corporates) to lend out to their customers on an as needed basis.

The way a large chunk of vehicle finance is generally raised is via securitisation (i.e. large amount of auto loans bundled together) and sold as a variant of asset backed bond with ~similar duration (maturity) to the bundle of assets.

BOE set's its base rate, sure - that's the spot (1 day) rate that banks can borrow at if they need to. Longer dated rates are very much set by the market, and the BOE certainly doesn't offer banks term loans(eg 3 year).

No healthy financial institution would borrow at spot from a central bank and then lend long term. If they wanted to put that carry trade on, they'd 'borrow' from their easy-access depositors and lend to Taycan buyers for 3 years and take the punt that the yield curve doesn't invert. Failing that they'd put some interest rate swaps into their loan portfolio.

Sorry, boring reply from ex-bond trader.
 


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Auto loans are generally bundled into Asset-backed securities which are tranched into tiers of priority for repayment, which have different risk profiles and typically different pay down schedules I.e different durations / maturities.

Obviously the return on these bonds is linked to the perceived credit risk of the different tranches and the returns available elsewhere on other similar assets,
 

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I’m sure they do, but they borrow from the BOE to fund the finance we take out with them. That’s all I know. I’m not privy to their complete banking structure.
All banks will use the BOE to manage liquidity from time to time, but the business model is certainly not to borrow from the BOE to lend to customers to buy cars.
 

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Not sure that's right. Central Banks are generally lender (short term cash) of last resort to the banking system / provide liquidity if need be to the system. They aren't there to lend cash to banks (and certainly not to corporates) to lend out to their customers on an as needed basis.

The way a large chunk of vehicle finance is generally raised is via securitisation (i.e. large amount of auto loans bundled together) and sold as a variant of asset backed bond with ~similar duration (maturity) to the bundle of assets.

BOE set's its base rate, sure - that's the spot (1 day) rate that banks can borrow at if they need to. Longer dated rates are very much set by the market, and the BOE certainly doesn't offer banks term loans(eg 3 year).

No healthy financial institution would borrow at spot from a central bank and then lend long term. If they wanted to put that carry trade on, they'd 'borrow' from their easy-access depositors and lend to Taycan buyers for 3 years and take the punt that the yield curve doesn't invert. Failing that they'd put some interest rate swaps into their loan portfolio.

Sorry, boring reply from ex-bond trader.
Not boring at all. Well I find it interesting for sure.
 


Sebbo

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All banks will use the BOE to manage liquidity from time to time, but the business model is certainly not to borrow from the BOE to lend to customers to buy cars.
Sorry but I’ve had this from folks pretty high up at Porsche so I’m not sure where you get your info from. Anyhow what’s does it matter. It is what it is.
 

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BigBob

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Sorry but I’ve had this from folks pretty high up at Porsche so I’m not sure where you get your info from. Anyhow what’s does it matter. It is what it is.
It’s probably been explained to them like that by a banker so they’d understand it 😊

the only linkage between a central bank and auto finance is central bank base rates are a very large determinant of interest rates at different points on the yield And credit curve. But it certainly isn’t the case that the BoE is lending porsche the money.

BoE rate hikes have pushed interest rates higher across the GBP board. Whether that means auto-financing rates should be going up by a larger or smaller amount than the base rate move (ie credit spread and or yield curve shape) is very much a question for someone in the market still. Which I’m not.

And don’t forget, they may be borrowing euros and lending GBP and lifting a leg on the FX. I’ll let someone else explain basis swaps and the like. Etc.

The high up in Porsche chap has the wrong end of the stick. Hope he’s not the CFO!
 

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The BoE is not a lending institution. Financial services institutions can deposit with the BoE at the lowest rate in the market because it it's essentially risk free. You may get a loan from the BoE but basically onlyv when you're strategically important enough that failure is not an option. There used to be a scheme whereby car manufacturers could sell their finance receivables (I.e. Amounts due from customers on finance deals) to central banks (ECB and others) in exchange for central bank notes, I.e. The central bank was taking on the purchaser default risk, which resulted in the low finance rates you saw a few years ago (going back to 2008, but this was to enable car companies to shift cars when purchasers couldn't guarantee long term affordability.

That is now over, and car manufacturers are back to traditional finance methods like borrowing from normal financial institutions and securitisation of finance receivables. Future risk of default has gone up because of financial market instability, and interest rates that investors require match that risk profile. Anything less than that rate and that investors won't pay par for the loan receivables. Also, you see MGFVs drop as well, as that is the residual risk that car manufacturers take.
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