Darling meets banks in loan talks.
I always thought the whole idea behind the government bailing out the banks was to ensure that they started lending again. But a property advisor recently told me that, although the bank rate is a mere 0.5%, it is not unusual for banks to insist that new mortgage holders pay anything between 6% and 8% and that this is because they want to encourage people to put as much of their equity as possible into these loans so that they can then sell off their mortgages as packages to other investment companies in the exact same way as led to the recent financial collapse in the economy.
I find that simply staggering. Firstly, I am gobsmacked that they are still allowed to sell off these mortgages to other companies, as I thought the whole thing which went wrong in the markets previously was this notion that one could lend to someone and then sell that risk on to someone else. Surely, this encourages people to make the kind of reckless loans which lead to the sub prime mortgage crisis in the first place?
Alastair Darling has called the bankers in for a meeting as they are apparently, despite being bailed out by billions, doing the same crap when it comes to lending to small business.
So, even by Knight's own admission, lending could take place at around 1%. But the banks are only lending at around 3% for people prepared to invest a large amount of equity into any business or home.But Alistair Darling has said he is "extremely concerned" that banks may be charging firms too much for loans.
The BBA's chief executive Angela Knight has denied this is the case.
However, BBC business correspondent Nils Blythe said that the statistics had been "misleading" and that lending to non-financial businesses had fallen last month, while the overall lending trend was "emphatically downwards".
On Sunday, the chancellor said he was concerned that the cost of loans to small firms had risen in recent months, despite the UK's record low base interest rate of 0.5%.He added that banks had a duty to restore lending levels, and that the government did not rescue the banking sector "out of some charitable act".
However, Ms Knight said the banks could not lend at 0.5% because they had to pay much more than that for the funds they themselves borrowed in the wholesale money markets.
She said the wholesale price of money was about twice the base rate.
So, in real terms, the crunch on credit remains. And that's primarily because they want to be able to sell their risk onwards with the guarantee that certain lenders have huge amounts of their own equity in these loans.
The whole notion of reducing the base rate to the historic low of 0.5% was to get the economy moving again.Stephen Alambritis, chief spokesman for the Federation of Small Businesses, said the chancellor was "quite right to haul in the banks".
"It is hugely important that Mr Darling keeps tabs on the banks to ensure they are lending money to firms, and at fair rates," he said.
"Firms need to be able to reap the benefits of the historically low base rate."
However, the banks are using this historically low rate to increase their profits rather than to regenerate the economy. Darling should threaten to tax their profits if they don't use the billions they were given for the tasks that they were given it for.
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7 comments:
British Bankers' Association here. Thanks for giving consideration to a wide range of perspective here - including our own. I hope you can accept this comment as well in the spirit of open debate.
Since the credit crunch the old rules have changed: although lending by banks was able to follow the base rate fairly closely in the era of cheaper credit it is simply isn't the case now. Yes, Angela Knight said the wholesale price of money was about twice the base rate at the moment, but there are some other considerable costs. For one thing, the Government demands that banks hold twice as much capital in reserve as they did during the good times: that money is therefore tied up and cannot be lent out. The risk of a customer defaulting is greater, so that has to be priced in as well. You get the picture.
And the statistics we issued before the Chancellor's meeting were absolutely correct and appropriate: the meeting was about small business lending and that is what our statistics addressed. Nils Blythe has asked us if in future we could include in our press releases information about lending to larger businesses - so we're going to do this too.
Hope this helps.
I accept some of what you say but am sceptical of some of what you claim as well. For example, I agree that there is a greater risk that some people might default, but doesn't giving them very high interest rates makes that more likely rather than less likely?
Banks don't want lenders to default. But remember - very basically - banks use money from their savers to lend to borrowers. They need to pay interest to savers, so they charge interest to borrowers.
If banks don't properly reflect that risk in the cost of lending, then when borrowers default the bank cannot pay the interest to its savers.
It isn't that straightforward, of course, and it isn't easy, but the interests of savers have to be considered too.
Banks don't want lenders to default. But remember - very basically - banks use money from their savers to lend to borrowers. They need to pay interest to savers, so they charge interest to borrowers.
If banks don't properly reflect that risk in the cost of lending, then when borrowers default the bank cannot pay the interest to its savers.
It isn't that straightforward, of course, and it isn't easy, but the interests of savers have to be considered too.
Well, I know the pittance that I am currently receiving as a saver and the disparity between that and what you want to charge me as a borrower.
It's the difference between those two which most of us find unacceptable. It looks like you are trying to get back the money you lost on the backs of borrowers.
What interest rate do you pay to your savers and what rate do you charge your borrowers?
We don't offer accounts - we're the trade association. But I absolutely accept your point that many are suspicious of the disparity between saving and borrowing rates, largely becasue there is a widespread feeling these should relate more closely to the Bank of England base rate. We need to do more to explain why this is no longer the case.
Our main problem is that too many commentators talk of bringing rates "back to normal" when the era of cheap credit environment they hark back to in fact wasn't normal at all - nor was it sustainable, as it turns out.
I don't argue that it needs show parity with the Bank of England base rate, although I think that would be desirable, but the disparity between the amount paid to savers and the amount charged to borrowers is what galls a lot of us.
And I'm not being funny here, but I ask this only because I suspect you know more about this than I do, but why did the Bank of England lower it's base rate to such historic proportions if not in order that this could be passed on to the consumer?
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