Saturday, November 08, 2008

The Interest Rate Cut

Apparently the banks were pretty miffed to be hauled up to see Alistair Darling and asked why they were not passing on the BoE's interest rate cut. The banks wanted to widen their margins some more (most didn't pass on the full 0.75% cut that took place earlier this year, and some didn't pass on the full 0.5% cut in October and they still wanted to widen their margins further by not fully passing on November's 1.5% cut). They've been whining about their profits - but bank net interest margins are more than holding up according to this article from the Times.

Of course it's not the British government's job to ensure the banks make profits. Merely to ensure that they don't collapse. After all, no one forced RBS to blow £49bn buying ABN Amro, no one forced Barclays to load up with worthless US sub-prime paper, no-one forced HSBC to buy the US sub-prime lender Household. The banks seem to think they are the most important part of the British economy and that it's the job of other well-run businesses like Tesco, Sainsburys and others to take a hit in profits because the banks have run their own businesses badly.

Actually banks only employ 15% of the British workforce. The other 85% is employed elsewhere. The reason it was imperative for the recent rate cut to be passed on was that the benefit should hit households in December in time to pay for Christmas. We know that the banks don't wish to lend, and that households don't wish to borrow. The only answer in those circumstances is to make people's existing mortgage payments come down, so they have more disposable income available to spend for Christmas. Which in turn will keep retailers and others going and hopefully help them weather the crisis.

There are 1.7 million borrowers who are on trackers or the standard variable rate, and they will benefit from the rate cut being passed on. Another 1.5 million mortgagees were on fixed rates that expire this year. Most won't be able to remortgage - but going from a fixed of 3.75% to a variable rate of 5% isn't as bad as going to a variable of 6.5%. If people can keep up their payments, there will be less defaults. If those on variable rates have more to spend, there will be less pain for the non-banking sector, which also has debts to service. Which should help the banks, except they are too bloody short-sighted to see it.

I note that Barclays and HSBC are still holding out on passing on the rate cut. They are making a fetish of their "independence" from the government. They should be careful though. Customers are not stupid. They will walk to those banks that have the lower SVR, which should make those elusive "profits" much harder to come by for Barclays and HSBC.


Anonymous said...

It may be the task of the British government merely to ensure the banks don't collapse but as with any business, if it doesn't make profits eventually it will go under. And banks failing totally is more expensive to the government in the long term. Banks ARE the most important part of the economy. Without them the economy really does seize up. We could survive every branch of Tescos closing, but we couldn’t if all the banks shut.
You are dismissive of the Financial sector as only employing 15% of the workforce. It does however pay over 25% on all corporation taxes and its employees are on average the best paid of any sector. So losses of jobs and profits there will hit the wider economy and government tax receipts harder than others. It is also a major earner of foreign exchange and give the runs on currencies around the world we might need all the dollars we can get if things go wrong.
My point is that it is foolhardy to force banks to pass on a full interest rate cut when their management thinks that might harm their profitability /viability. For the banks with substantial government holding they have an implicit guarantee from their major shareholder so if cuts did hit profits, the government (i.e. taxpayer) will accept the loss (in dividends and tax revenue). Barclays’ new shareholder may not be so forgiving.
I’m sceptical about the banks customers moving away from those that don’t pass on full rate cuts. If one set of banks are offering substantially lower mortgage /saving rates then we should see people moving mortgages. Except of course now unless you have 30% equity in your house (which thanks to the falls in house prices less and less people do) it is very hard to find a bank that will take you on. Adding in remortgaging costs and the fact people stick with 'their' bank and you can see why Barclays and HSBC can look to pass on less than the full interest rate cut. The consumer hot-money is in saving accounts and savers are clobbered by the rate cut so they will flock to banks with higher rates (as long as they aren’t Icelandic).

snowflake5 said...

Devonchap - click on the link I supplied in the main post. The bank's net interest margins are INCREASING. Which means they are making profits. They just thought opportunistically that they'd use the "Poor me, credit crunch" argument to increase margins even further to make up for their boneheadedness in other areas such as their investment banking divisions.

Regarding whether people will switch mortgages depending on whether their bank passes on the SVR - the very good customers undoubtedly will. Plus banks concerned will get reputations that are hard to budge without years of advertising to correct perceptions.

As for the economy as a whole - the most important thing is Christmas. Many retailers are holding their breath. Christmas is the most important trading period for them. If they can weather it, they'll be OK. If they can't we'll see a ton of redundancies in January. That's why it was imperative that the govt made the banks pass on the rate cut.

Voters understand this - and they'd be dismayed if they were aware to what a great extent Conservatives like you are arguing that the rate cut should NOT have been passed on and that households should be made to pay for the mistakes of bankers while the likes of Bob Diamond gets his big bonuses. Labour is missing a trick in not publicising how cruel and corporate-centric Conservatives are.

Anonymous said...

The banks have been taking terrible losses and write-downs. Any business that is losing money in one area is going to look to make it back in another. Why is that a crime? I repeat that if they makes losses eventually they go bust.

Secondly, for the umpteenth time, just because I disagree with this government does not make me a Conservative. I want this government to lose the next election because they have run out of ideas and have squandered the last 11 years. More often than not they do the wrong thing. Sadly we live in a two party system so if Labour loses the Tories get in. I’m not very impressed by the Conservative approach to the credit crunch. But sadly this government has created a structural deficit during economic boom times that mean the necessary deficit spending in a recession runs the risk of a run on the pound. If that happens the fault will be that of this Labour government.

A Conservative government may be no better than this current shambles but democracy thrives on alternation of parties and this government is tired and failed. Britain needs a change and sadly the Conservative Party is the only alternative. In 1997 I wished on Tony Blair, but 13 years will be enough of any one party.

Anonymous said...


It could be argued that you are the cruel party - insisting that savers who have worked hard to build up a lump sum are penalised by enforced rate cuts so that feckless borrowers can spend us out of a recession by buying high street tat.

Rewarding people who do the right thing seems not to appear on Brown's radar.


Anonymous said...

No more boom or bust?

snowflake5 said...

devonchap - you are arguing that the right of banks to make profits is far more important than the right of the non-banking sector to make profits - despite the fact that the non-banking sector (tesco, Sainsburys, John Lewis etc) have run their businesses well and the banks have run their businesses badly (the write-downs they are making are directly because they were foolish enough to spend good money on worthless derivatives). And despite the fact that about 85% of the economy is not banking.

Forget fairness, how does it accord with your so-called capitalist principles to force good non-banking businesses to pay the penalty for mismangement within the banks, while allowing the same incompetant bankers to try to act as leeches on households and non-banking businesses to make up for their own stupidity (and to maintain their bonuses regardless)? Surely the only people who should pay for mistakes by bankers are the bankers themselves and the shareholders who egged them on to take the risks they did.

maltese falcon - You clearly haven't got the memo that Ken Clarke as announced that he is the author of the no more boom and bust phrase. Looks like I'm going to have to keep posting the link till Tories realise!

Danivon said...

Big Jock -

So all savers are 'prudent' and worthy, and all borrowers are 'feckless'?

What about companies that borrow to invest, who create jobs and wealth through that investment? They are the ones hit by the credit crunch.