As soon as the cut was announced, we had the usual commentators saying, "this will prompt savers to stop saving and withdraw their money, and then banks won't be able to lend", or words to that effect.
But the rate cut creates a new potential source of capital for the banks, other than savers. Many borrowers on tracker mortgages, standard variable rate mortgages, and those who have just come off fixed rates onto the SVR, have experienced big cuts in their monthly mortgage payment, increasing their disposable income.
HSBC have spotted the potential and have written to all their mortgagees on tracker rates, encouraging them to use their freed up money to overpay their mortgages. It's good advice - this is a unique opportunity for homeowners to shed their debt. Once rates rise again, their disposable income will shrink too, unless they've taken advantage of current circumstances to reduce their loans. Current conditions are highly unusual, low interest rates will last a year to eighteen months at most. And when rates go up, they will go up fast, as the BoE seeks to avoid the mistake Greenspan made in 2001-2004. If people want to permanently increase their disposable income, remembering that you pay tax on what little interest you earn, whereas overpaying the mortgage gives you a gross return, paying off the debt is a no-brainer.
But it would be really good for HSBC too, if their tracker mortgagees overpaid debt. They'd be getting capital, just as surely as if they had received increased savings deposits. And they can then either lend the capital back out to business at rates which are more lucrative than getting base rate plus 0.5% or 1%, or keep some of it back to shrink their loans to capital ratio. Given that on the retail side loans to capital are about 8 times, persuading people on variable and tracker mortgages to overpay is more lucrative than attracting savings.
I'm surprised more banks arn't taking similar action, especially those who were silly enough to offer deals where the tracker was below base rate. Some newspapers such as the Daily Mail and some money forums such as MoneySavingExpert are trying to get people to overpay mortgages, but the industry itself needs to start publicising the benefits.
As an aside, the real excess lending was done on the investment banking side, where loans of about 30 times capital were made. Unfortunately they'll be less able to get their clients to repay, as the hedge funds and buyout firms etc they lent to are broke.