I screenshot the picture beneath from HSBC HK's website. Scroll down a quarter of the way, and click on 'Rates' to download that PDF. I ask just about loans under my green 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 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.

  • $\begingroup$ Bank loan money to business by using money deposit the public, this is heavily regulated. For the investment part, most of the bank do sell investment derivative that they can charge a good amount of commission with little risk to their business, even if the derivative go bust. $\endgroup$
    – mootmoot
    Aug 5 '19 at 14:06
  • $\begingroup$ money.stackexchange.com/q/95315/44214 $\endgroup$
    – user4020
    Nov 17 '19 at 1:20

XSP is riskier than the preferential rate personal loan. The Standard and Poors 500 is a large composite of U.S. equities, hedged (short USD, long CAD). XSP combines the equity market volatility and the USD / CAD volatility but it tries to offset currency value change by holding a hedge. Some of the volatility is offsetting; some is additive. The equity composite risk is acceptable for many investors if they intend a long investment period, for example, 30 years. The USD / CAD risk is acceptable for some investors if both the Federal Reserve and the Bank of Canada manage to achieve roughly equal inflation rates over the long investment period, but XSP's manager aims to minimize this risk. For many investors, the risk of XSP is only acceptable if a long investment period is intended. However, the preferential rate personal loan is likely for a shorter period. Over that shorter period XSP is expected to be riskier than the personal loan. The preferential rate personal loan is made after checking employment history, income, assets, and other indications of ability to meet obligations. A bank's business model is to own loans; not huge amounts of an equity index. Bank regulators force banks to keep risk below a certain level.


If XSP is held in the investor's taxable account, keep in mind that the XSP manager sometimes returns capital to the investor which lowers the investor's average cost. The XSP manager sometimes reinvests cash into more equity which effectively means it raises the investor's average cost. Unless you plan to invest extremely large amounts, you might find keeping track of these things to be not worth the effort.


There was a request for information about XUS. You avoid the "currency hedging risk" inherent in XSP by choosing XUS instead. Currency hedging risk is the risk that the fund manager's hedging activity imperfectly eliminates your exposure to the USD which is inherent in the underlying asset which is based on the S&P 500. By choosing XUS instead, you are accepting "currency risk". That is the risk created by exposure to the USD which is inherent in the underlying asset which is based on the S&P 500.

In this risk chart they show that XSP has both kinds of risks, because the hedging is imperfect so XSP still has currency risk. By implementing hedges, the manager aims to make that currency risk less than what is in XUS.


  • $\begingroup$ thanks. to rule out the currency hedging risk, I changed ETF to XUS. can you pls update your answer? $\endgroup$
    – user4020
    Aug 4 '19 at 5:05

The short answer is “fractional reserve banking” — the banks lend out money that they create (governed by regulations and reserve requirements) while they would need to invest their own money in outside investments. Being able to earn interest on “free money” means that even with lower rates of return, those kinds of investments tend to be far more lucrative.

  • $\begingroup$ This is the real answer. I wish I could pay zero percent on near 100X leverage. I would happily leave that in a high-interest savings account. $\endgroup$
    – heh
    Nov 18 '19 at 21:06
  • $\begingroup$ @heh Bank bonds don't yield zero so bank financing is not "free". A deposit account yielding zero or close to zero still creates the cost of providing account services and ATMs so again, not free. The real answer is what I posted in my answer... "a bank's business model is to own loans" under the eye of the regulator. $\endgroup$
    – H2ONaCl
    Apr 29 at 21:35

It's more complex than that Banks loan in different interest rates to different customers based on their cost of capital and loaner risk. They earn the difference between their cost of capital and interests paid.

The do not hold a dollar in deposits for each dollar loaned, but far less (depends on regulations, or internal policy. Bazel 2 recommendations talk about that). So the return on loans can and should be higher than any external device, in relation to the risks.

Banks do manage their cost of capital in financial divisions in charge preciely on that, including profitable trades on the banks money. These accounts are called "nostro"

In a broader sense any company can invest in capital markets instead of going about its business, as capital market derive from business activities and not the other way around, logic says its not a sustainable model. Yes, stock buybacks in exchange for company leverage is a bubble inflator and not something sustainable...


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