3 years, I’ve built up a “sizeable” unit trust investment-stock portfolio with a bank or investment company. The funds I spent are of moderate risk mostly. Two weeks ago, my RM from the bank asked one of the financial consultant to perform a “crisis-simulation test” on my existing portfolio. The test was to see how my investment would have been affected by “Sub-prime crisis”, “SARS turmoil” and “Global FINANCIAL MELTDOWN”.
It proved that my collection was quite resilient and could have withstood the many crisis. In all 3 tests, the value would have lowered significantly less than the benchmark and recovered quickly after the crisis. In the worst case the portfolio dropped by 25% but soon recovered after six months. My RM told me that I could let my money work harder then. Noticing that I am a significant “passive” investor and prefer to hold my investment in the longer term, she suggested that I possibly could “pledge” some of my portfolio to the bank and get financing to buy more funds. 3.8%. You will find no other admin or managing charges aside from the interest.
The loan is some sort of flexible type which I only pay interest while I draw down the loan. And any right time I possibly could sell the machine trust and pay back the loan, without any penalty. To buffer the chance of price fluctuations, I should only pledge part of my profile rather than draw down the full amount. So there would be little risk of a margin call. Sounds good with most of the thinkable risk mitigated. MUST I enter this?
The first pass assumption should be that makes the financial system less efficient. Too much other finance, and little activity financed by banks too. Of course, if banks held T-bills just, there is absolutely no such loss then. The banks would hold fewer T-bills and the ones with them as a money substitute would hold more.
Now, through some unusual transforms of occasions truly, suppose that the government repeals the regulation on deposit interest rates solely for households. Thankfully, households are no more exploited, but still, companies are motivated to minimize their transactions amounts and use money substitutes instead. They don’t earn interest on their deposits.
Perhaps this is some kind of rent-seeking equilibrium, but it is hard to see how it is efficient. Why not only have the banking institutions contain the T-bills (as well as perhaps other assets) and pay competitive interest to the companies? Well, there would be less business for the connection dealers making marketplaces in the securities and the companies’ own money market investors would have to find new work.
Suppose a loss of rely upon those trading the T-bills builds up, and so companies switch to keeping deposits. That is an exclusive calamity for those trading T-bills, including the firms’ own money managers. But the social problem is resolved. The banks just choose the T-bills that would have been held by the firms. Finally, imagine rates of interest on T-bills fall. This makes the advantage of trading T-bills as a money substitute smaller.
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The price ceiling on business deposits becomes less relevant. Presumably, the result would be for companies to hold deposits in banks instead of T-bills. Again, the simple solution is perfect for the banks to buy the T-bills. Of course, this remains a private calamity for those trading the T-bills. All those extra transactions in T-bills generated income for them.
And those who traditionally worked so difficult to manage their companies’ cash positions will have nothing at all to do. But, of course, a lot of their activity was inefficient waste materials all along. Now, let’s suppose that our money market traders react to lower T-bill yields by trading commercial paper supported by securities backed by mortgages. Rather than sell them and make a purchase then, it is possible to borrow on them, and make a purchase then.