Interesting times
Please don't cut interest rates, the banks and building societies are pleading, in the final hours before the Bank of England's monthly announcement - just one of the more surreal aspects of monetary policy.
Banks are usually delighted to have an opportunity to use interest rate cuts to boost business. Now, they are desperate for the Bank of England monetary policy committee to give them some room to keep savers saving, and to keep at least some hope of making profits this year.
The traditional branch-based instant access savings account is now earning an average 0.29%. You can do better with a fixed rate bond, currently averaging 2.3% across the industry.
Without savings, they have to go to wholesale markets for the money they lend, and we now know how fickle and expensive that can be.
And without profits, those notoriously troubled bank balance sheets are depleted. On both counts, lower interest rates make it more difficult for banks and building societies to lend.
And some of the more responsible among them, notably the building societies, are understandably irked that they are having to use some of their profits to pay for higher costs of the industry's savings protection scheme.
One of the results of this process is that it makes it difficult for banks to sustain free banking to those in credit.
Not only are they cutting back on their interest-bearing current accounts. Pressure is building for a start to charging for current accounts, as is common in some other countries.
Unable to earn anything significant from the money held in current accounts, that means pressure building for an annual fee, or fees for individual transactions.
Add to that the big cut in bank earnings - £2bn annually, it is reckoned - if the Office of Fair Trading secures the right, for which it is fighting legally, to cap the charges banks can put on unauthorised overdrafts.
Effectively, customers could soon be paying the banks for providing the most basic service, which is where banking first grew out of gold and silver traders - giving us somewhere safer than the mattress to store our moolah.
Hullo, I'm Douglas Fraser, and I'm business and economy editor at ³ÉÈË¿ìÊÖ Scotland. Welcome to my blog, where you can read my take on money matters, viewed from a Scottish perspective.
Comment number 1.
At 5th Mar 2009, Goldenbeans wrote:Before this fiasco all banks were making a lot of money from us anyway.
Even now they are typically lending at 10%, borrowing (our deposits) at less than 1%, with 2% inflation that gives them a "margin" of 7% to cover their "admin" costs. Put it another way, for every £10,000 they lend they make a gross profit of at least of £700. Much,much more for credit cards.
I for one will not weep for banks.
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Comment number 2.
At 5th Mar 2009, thatotherguy2 wrote:Banks are an absolute menace these days. You can't wipe your nose in front of a teller without them commenting on your account and transactions and wanting to T you up for an interview with their instore salesmen.
I got my old mum out of the stock market at 6800. When she put the cash on deposit she was talked into......putting it back in the stock market by a salesman at Bradford and Bingley. She got £13k compensation but it was a time consuming pain for me.
In the teeth of the bank crisis I got her to move her capital into more than one bank so as to be under the threshold safeguarded by the government. Last time I saw her she told me that she had tied up her money in one of these banks for a higher amount of interest. In other words some salesman had stuck her in the bond market (I would imagine). I give up. Modern banking is a game for spivs. I would happily pay an annual fee if they would just do what it says on the tin - act as a bank not as a training ground for charlatans.
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