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How much should banks cut rates?

Robert Peston | 10:41 UK time, Friday, 7 November 2008

Spare a thought for those poor misunderstood chaps who run our big banks.

They've been bashed and battered for causing our current mess, by lending far too much too cheaply in the years preceding the onset of the credit crunch in August 2007.

And now they're being duffed up for making a more realistic assessment of the true risks of lending, and therefore failing to pass on all of the 1.5% reduction in the Bank of England's policy rate to borrowers.

I'm not being flippant, by the way. There is a serious point here.

We can't have it both ways. If, which is the case, the cause of our woes is that lenders lost sight of the true risks of lending - and you'll also have heard that diagnosis from the Bank of England and the Financial Services Authority - we can't really react with total outrage when the banks attempt to set the interest rates they charge us at a level that captures the probability that some of us won't be able to repay.

And, to tell you what many of you know from painful personal experience, the risk of a borrower defaulting rises when the economy shrinks in just the painful way that it is doing right now.

But, you'll say, the economy would shrink less if only the banks would lend more to small businesses and homeowners and at cheaper rates.

The banks are surely shooting themselves in the foot by restricting the flow of credit and increasing its cost, because in doing so they are turning our troubling economic plight into something rather worse.

You'd be right.

Where as it's wholly rational for any individual bank to take a much more cautious and conservative approach to lending, it's wholly irrational for all of them to do so at precisely the same time, especially when the economy is so weak.

That's of course why the Bank of England has reduced what it calls its Bank Rate by far more, 1.5 percentage points, than it's ever cut before (or at least since taking control of setting rates in 1997).

Bank of EnglandThe Bank of England knows it can't be certain that the Bank-Rate reduction will be passed on in full in lower mortgage rates or cheaper money for businesses.

It's slashed enough, however, to be confident that a useful proportion of the reduction - perhaps half - will be passed on.

Now the really important point to understand is that the Bank of England can influence the cost of money for the banks, which in turn determines the rates that they can afford to charge us, but it does not set the cost of money for them in a mechanistic and precise way.

If banks were able to borrow from the Bank of England all the money which they then lend to us, then of course the Bank of England could set the interest rate we all pay.

But most of banks' cash resources, what they need to provide loans, comes from elsewhere.

It comes from us, in the form of the balances in our current accounts and whatever savings we have in our deposit accounts.

It comes from managers of hundreds of billions of pounds, who lend to banks for short period and for longer periods.

And it comes from other banks, since banks also look to each other for funds, to smooth out the peaks and troughs in their cash needs - via the now famous interbank market.

To a great extent, what really matters for the banks, when setting the interest rates they charge us, is what all the money raised from all those many different sources actually costs them, when it's all lumped together and averaged out.

Some of that money still costs them nothing or almost nothing. I'm talking about the funds that some of us still keep in current accounts that pay zilch.

But, as I pointed out in my recent note ("Why interest rates aren't falling") the cost of obtaining any substantial funds - especially from those money managers that look after squillions - has been rising since the onset of the Credit Crunch. And the main reason is that money managers believe the risk of lending to banks has risen very sharply, and they therefore want to be compensated for that additional risk.

So what is the average cost of money for our banks?

Well, it's not the Bank of England's 3% Bank Rate. Apart from anything else, that's a rate for borrowing overnight - and it would be foolish even by their standards for banks to set interest rates on loans to us with maturities of three months, or two years or five years on the basis of what they have to pay to borrow for 24 hours.

A traditional proxy for their average cost of money has been the three-month LIBOR rate, which is what banks pay for unsecured loans from other banks of three-month duration.

However, there is controversy over whether that rate is quite as accurate a measure of the genuine cost of funds as it once was.

But, for what it's worth, those who operate in the market believe that three-month LIBOR will fix at just under 5% this morning.

Which would mean that the Bank of England's 1.5 percentage point cut had reduced the cost of money for banks by around 0.75 of a percentage point, perhaps a tiny bit more.

There is therefore an argument that mortgage rates and loans to businesses should be reduced by at least 0.75%.

And if banks fail to do this, well then the Chancellor - and the rest of us - are probably entitled to biff the banks.

Chancellor Alistair DarlingThat said, the Chancellor is not quite the innocent bystander in all of this.

As you'll recall, he recently rescued the banks with a £400bn taxpayer-funded package of capital injections, guarantees and loans.

A very important part of that was a commitment to provide taxpayer-backing for £250bn of tradable debt issued by banks with maturities of up to three years.

To translate, we - as taxpayers - will stand behind a bank when it borrows from financial institution. We're saying we'll repay the banks' debts if it can't do so.

The Chancellor understandably took the view that if taxpayers are in a sense insuring the money being borrowed by banks, we should be paid for that insurance.

But the cost of that insurance isn't cheap. It's working out at between 1.2% and 1.7% per annum of the amounts being borrowed for most banks.

That's 1.7% that has to be added to the 4 per cent or so interest-rate cost of the funds being raised.

In other, the price of money for banks under the government's own sponsored scheme is somewhere over 5%.

It's therefore very difficult to see how the banks can charge us less than the 5% that the Treasury is demanding they pay for the vital taxpayer-backed funds they need.

Unless, that is, the Chancellor were to decide that the banks should be transformed into loss-making public utilities.

UPDATE: 13:05

Three month sterling LIBOR has in fact fallen just over 1 percentage point to 4.49%. There will be intense pressure on the banks to pass this cut on in full, at the very least in the rates for new tracker mortgages.

Comments

Page 1 of 3

  • Comment number 1.

    They should cut them at all.

    We should be cutting taxes

  • Comment number 2.

    So banks are damned if they do and damned if they dont, how sad never mind

    If they had had the forseight to see this predicament, which judging by their pay scales and bonuses, one would have expected them to have seen this coming then we would not be having this discussion, unfortunatley GREED overcame common sense and now they find that Joe Public expects to see some action for all the Tax Payers money pumped into these organisations presided over by pompus asses in glass towers.

    and what action do these banks do, withdraw all the tracker deals on the same day that the BoE cuts the interest rate, brilliant move chaps, so glad you are in charge.

  • Comment number 3.

    'loss making public utilities' - great! Lets have more of these. The more this crisis unfolds the more we seem to be in a 70s timewarp.

  • Comment number 4.

    Robert, A great and perceptive analysis as always. However, there is the question of culpability and moral responsibility to be considered here too. Many banks are now in receipt of public money and ALL banks are individually and collectively responsible for this mess. If the price of business is currently to make a loss they must learn to do what all businesses have to do from time to time - and eat it.
    If they are bothered about that perhaps the time has come to plough some of their obscene bonuses back into their own firms?

  • Comment number 5.

    5% plus or minus half a percent is a reasonable rate to be charging for mortages in the current climate. 2% is a reasonable price for risk, and would offer the banks a chance to rebuild capital bases, and repay the taxpayer.

    I don't think there are too many people calling for mortgage rates of 3%. No-one wants, or should want, risk priced at 0.

    On the other hand, there is no excuse for lenders keeping their standard variable rates at or around 7%. Those lenders who do so should face the threat of legal action for extortion.

  • Comment number 6.

    Conceptually, there's a simple answer: the banks should be encouraged - if not forced - to deploy conventional risk management assessments.

    So - mortgage for a buyer with a good steady income putting down a very big deposit = very low risk = lowest-possible interest rate

    Shaky SME with no order-book beyonf Xmas = very high risk = high rate or indeed no loan.

    Because we are in such big trouble - it's self-referential, the 1.5% cut proves it - this is the only answer.

  • Comment number 7.

    Do we have state controlled media in this county now?! Looking at all the newspaper headlines this morning blaming the 'bad, greedy bankers' for not passing on rate cuts made me wonder how free our press really is. GB and his government must have influential friends! They know the sums don't match but they want 'the masses' to blame someone other than them. And all this media tosh about GB being a great leader in all our financial turmoil - it's so ridiculous, how / why are the public buying it?!!

  • Comment number 8.

    Robert, you say the banks are criticised for lending too much too cheaply - I dont think thats true, surely they loaned too much to people who could never afford to pay back, almost regardless of the interest rates. The so called sub prime market.
    By penalising good commercial risk companies and individuals they are expecting us all to redeem their mistakes. They should pass on the rate reduction in its entirity.

  • Comment number 9.

    Inflation of asset prices in which households and industry borrow more and more against the rising price of their collateral

  • Comment number 10.

    Seems simple enough to me - how can they be expected to lend money at 3%, and pay interest at 6/7%?

    Either they needed the bailout to not go bankrupt, or it was to lend out even more money for people to buy overpriced houses.

    If they want to stay out of bankruptcy, then forcing them to lend out money, and charge interest on repayments, cheaper than they give out interest on savings, sounds like a good way to be asking for another bailout in short order!

  • Comment number 11.

    the banks should convert all trscker mortgages to fixed rates for 2 years, raise their interest rates dramatically, and the government should get the bail out money back and use it for massive tax, vat and paye cuts for anyone earning less than £35,000 a year. Also tangible support for small businesses. Cheaper than all the benefits they are very shortly going to have to pay out.

    Alsoban credit cards and unsecured loans - encourage people to save not borrow.

  • Comment number 12.

    It's not low rates (alone) that have caused the problems but the banks lending 5 x salary etc for a mortgage.

    If there was legislation in place (wake up FSA) limiting how much people could borrow, then we wouldn't be in this situation and house prices wouldn't have risen too far either.

    Rates are not the real issue here.

  • Comment number 13.

    Bankers bashed and battered? Duffed up?


    If only.

  • Comment number 14.

    Excellent blog. Explains the dilemma very well. It also explains why the BoE made such a substantial cut in intersts knowing that perhaps only half of it, if that, would be passed on to retail borrowers.
    I suspect this myth of 'cheating bankers' will fade from even the tabloids soon as people realise that the banks' hands are actually tied for the time being.
    Thinking back to the last recession in the 1990s, there was nothing like the media hysteria we have today. People knew times were tough and quietly got on with the job of working their way through it as best they could. And we did get through relatively quickly. This time people are furiously - and understandably - battening down the hatches in response to the media hysteria, which is making matters far worse than they should be.
    Here's a thought, then. This recession may just turn out to be nothing like as bad as people think. Looks to me like a great time to be investing.

  • Comment number 15.

    Sadly Robert Peston fails to mention the central issue issue here: banks have techniques and technology to identify and measure risks... whether in buying assets, in lending or in borrowing. They've failed to manage these risks properly... hence the credit crunch. What they need to do now is to use this know-how to segment markets which entice deposits and make loans in ways that are helpful to sustained economic growth.

  • Comment number 16.

    What you are arguing in effect, Robert, is that the base rate cut, however large and dramatic, is only going to have a marginal benefit on the economy at large.

    I could not agree more.

    If it keeps some people in jobs they would have otherwise lost and other folk do not get their homes repossessed then all well and good.

    It is not a cure for our woes. There are only two forms medicine which are appropriate: time and hard work.

    We are going to have to have a lot of both before we see the back of all this grief. I just hope there is enough hard work to go round everyone.

    All we need now is a government that encourages it!

  • Comment number 17.

    The Banks have to deal with the after effects of inflation of asset prices in the same way that households and industry have borrowed more and more against the rising price of their collateral.

    They still have to pay the existing debt off with equity that has shrunk significantly or vanished all together

    The Interest rates charged become a blunt instrument that have little or no effect. The question therefdore, becomes futile.

    You have to change the thinking away from making the rich richer to making the poorer richer. You must cut taxes to allow the poor /middle class to have SPARE cash to pay off debt and/or BUY goods instead of encouraging to people to lborrow on unstable foundations that the financial institutions are unable to or wont lend to anyway

    The Bottom line is always more important than the top line!

  • Comment number 18.

    There have been many comments on this site over the months that this would not work. Britain is in the proverbial and Brown is simply pouring BILLIONS of OUR money to save his own skin. Where are all the muppet MP's and HM's Opposition party.

    Stop the waste, stop the irresponsible lending and STOP now, this Governments mad, mad, mad spending by out of control departments

    Will Brown bring in exchange controls when those "prudent" and hard working people decide to look overseas for an acceptable return on their earned and taxed savings.

    Had enough

  • Comment number 19.

    If nothing else the global credit crisis has demonstrated in a clear and consise way how complex and confusing banking is. Perhaps it would be a good time to simplify it. This would help us the public and banks understand it!

  • Comment number 20.

    This time Robert you have it completely wrong. Prudent lending is about ensuring the borrower has the ability to repay and not allowing them to enter into a commitment they cannot fulfil. At the same time the value of any collateral offered for the borrowing must be accurately assessed. In cases where the asset value of the collateral can vary then an appropriate margin of safety for the lender should be allowed. In simple terms the lender insists on a large deposit (25% or more) when lending against property. Good quality lending means lower interest rates for the borrower because the risk to the lender is less. Banks have been lending recklessly at low rates and thus not pricing in the risk they were taking. In addition the banks have been borrowing short term in the wholesale money market and lending long for mortgages. This is a recipe for disaster - another high risk strategy that was not priced in either. The tax payer having bailed out the banks to save the shareholders who would lose most, they (the shareholders) should be only too pleased to allow their saviours some relief. Moreover, the move is essentially aimed at revitalising the economy. If the banks put two fingers up to it they will only have themselves to blame as they write off even more debt - not toxic debt - but borrowing that even quality customers cannot afford to repay.

  • Comment number 21.

    Irresponsible lending and speculation appears
    to have caused the crash.
    The solution appears to be further partly risky
    lending to stimulate demand.
    Will this "hair of the dog economics" work?
    Perhaps yes in the short term, but I fear the
    longer term heralds higher taxes and higher interest rates.
    And where does the money supply sit in all
    this? Will Governments simply be tempted
    to print more in a short term fix?
    Savers who supply capital to the system have
    barely been mentioned.
    How are they to be kept on board with drastic interest rate cuts

  • Comment number 22.

    Thump. That was the sound of me fainting. Mr Peston actually being polite about British bankers? Surely some error? is he not feeling well?

  • Comment number 23.

    Surely the banks should cut their interest rates accordingly BUT only lend to people/businesses that can afford to repay the loan. Isn't this what they should have been doing all along in the first place and why we are getting into this mess. If they had applied this principal all along then loans would never have been available for all and sundry who couldn't pay them back. Even now I still get mail through the door offering me instant loans for many thousands of pounds from companies I have never dealt with. I suppose some things will never change - sell a loan and make our books look good then we get our huge bonuses.

  • Comment number 24.

    All the main parties are WRONG to support lower interest rates.

    1) will cause inflation sooner than they might think

    2) Will weaken the pound (see (1) )

    3) Will discourage saving, which is exactly the opposite of what is needed

    4) if too much debt is the problem, how is more, cheaper and easier debt the solution?

    It is also misguided to demand that the rate cuts are automatically passed on. The banks need recapitalising, and they need to price correctly the risk of making loans. As Mr Peston says, they got this badly wrong before, and two wrongs do not make a right.

    I fear for the economy in 12-18 months time, with high imported inflation, shrinking GDP and collapsing tax receipts. IMF here we come - 1976 all over again.

  • Comment number 25.

    Isn't there another issue too? Banks have to cut interest rates for their tracker mortgages when the base rate comes down. Interest rates are now so low that margins on these morgages must be close to zero. This obviously affects their profits, so they have to try and make this up somewhere by keeping rates higher for all other loans.

    And don't say that they should make do with lower profits - they're going to have to do that anyway because the volume of lending has collapsed and they're going to have to write off billions in bad loans.

  • Comment number 26.

    Bob

    You missed the point that in fractional reserve banking they lend the same money multiple times issuing new debt.

    In essence they borrow £1000 from BoE at 5% cost £1050
    they then lend that £1000 ten times over.
    If they charge 0.5% interest they would profit £9000 as the return would be £10050.

    The con that all banks perpetrate is that the savings rate or the rate they borrow the money at has anything really to do with their lending rate.

  • Comment number 27.

    FINALLY, Robert Peston begins to acknowledge that interest rates are too low.

    "How much should banks cut rates?"

    The premise of this question is wrong, as clearly illustrated by the actual body of your blog. The banks have insufficient funds and need to attract them ("the cost of obtaining any substantial funds - especially from those money managers that look after squillions - has been rising since the onset of the credit crunch"); ergo, the banks need TO RAISE INTEREST RATES.

    Or another way to look at it: lubricant is too expensive, so let's just continue trying to drive this car without any lubrication for the engine, no matter how slow we have to go or how much irreparable damage we do.

    And so the financial madness continues...

  • Comment number 28.

    To a man with a hammer, everything looks like a nail.

    Gordons tool box is too limited.

    Banks going bust is not as serious as small businesses and individuals being made bankrupt.

    Gordon is trying to fix consumer problems by working with the banks, instead of addressing the consumers directly.

    If he wants to do it via the banks (he is wrong to do it this way, but we are where we are) then let the banks charge what they like, tax it off them and give it back to the customer as individual tax cuts.

    Simple.

  • Comment number 29.

    I know we all blame the bankers which yes so we should. But, we should also blame the greedy estate agents. It is through the estate agents sheer greed and that a lot of people are in this mess by out pricing homes from the first time buyers.

  • Comment number 30.

    Did I hear Robert telling us on Today that the credit crisis happened because the banks lent too cheaply? If so, that's today's Pestonism. Surely the key word is not cheapness but responsibility? I have a radical proposal that may help: set up mutual savings and loans companies for house purchase which have a margin of a half percent between borrowing and lending- enough, because there are no shareholders. Ensure that they lend responsibly, with fixed lending limits- and only lend their own money to people who are "members", perhaps with an established saving record. This tends to restrain house price hyperinflation. Allow them to fix rates openly between themselves, remaining responsive to their members and the national interest. A good name for these local groupings could be "Building Society" -reflecting mutuality and solidity.

  • Comment number 31.

    It looks like today's blog is trying to soften us up, so that we don't blame Alistair Darling for not doing more when bank's don't pass the full 1.5% cut.

    Your final comment on the blog confuses me:

    "Unless, that is, the chancellor were to decide that the banks should be transformed into loss-making public utilities."

    According to figures quoted elsewhere yesterday, only 10% of mortgage borrowers are on variable rates - 50% are on fixed rates unaffected by the rate decrease and 40% are on trackers which will automatically decrease by 1.5%.

    Are you honestly trying to say that banks would become "loss-making public utilities" if they reduced the variable rate which just 10% of mortgage holders pay by 1.5%?

  • Comment number 32.

    People in Britain already have low interst rates to pay on a mortgage?
    The problem as we all know (or will soon realise) is really with the amount that people need to pay this interest on or in other words, a stupidly high mortgage because of stupidly high house prices.
    Gordon & Co are playing catch up as they allowed this mess to happen in the first place through lack of regulation.
    1, The root cause of this is because of cheap money be made available to the general public (who are mostly financially ignorant - sorry but its the truth as they genuinely believed that house prices would continue to rise forever)?
    2, Cheap money was available because we had low interest rates.
    3, We had low interest rates bacause we had low inflation figures.
    4, We had low inflation figures because of the method which was introduced by labour back in 1997 (The CPI inflation calculator which doesn't include house prices - hence why house prices have gone up approx 300% since 1997).
    What I now find amusing (or very worrying if I was to be perfectly honest) is that when Labour first got in back in 1997, I remember a certain person saying "No more boom and bust" and "we will not allow house prices to get out of control"?
    The way Labour tried to do this was by introducing an inflation calculator which as I have already mentioned, doesn't include house prices or council tax BUT does include DVD players which is very handy as we all buy DVD players on a weekly basis and need them for shelter)???
    No wonder our contry is in the mess it is now and has very worrying debt levels......

  • Comment number 33.

    #24 and others

    It sounds wrong that since low interest rates and cheap credit caused the problem, that low interest rates and cheap credit are the solution.

    But November 2008 is not April 2007. In the heady pre-crunch days, the excesses needed curbing. Now the pendulum has swung too far the other way and no one wants to lend any money or buy anything.

    What we need now is ways to stimulate the economy, not slamming the credit door shut. That is what caused the Great Depression.

  • Comment number 34.

    The one lender that the government does have power over, is of course, Northern Rock- and they have the highest SVR of all the mainstream banks- so we'll wait in anticipation for them to drop their rate by the full amount!!

  • Comment number 35.

    Dear Robert

    Please explain (in very simple terms) to the people who write BBC News 24 scripts why a cut in the official rate does not mean the banks have been passed a lower rate which they can pass on. Please ask them to stop talking about "passing on" the cut as if the banks were were playing pass the parcel.

    Please try to take over as editor of all economics news on 24 so we shall not have to listen to the drivelling nonsense put out by the clowns who currently produce it.

    {Perhaps you would also explain that the RPI/CPI does not stand at (say) 4.6% and that neither a year on year increase in an index nor a greater increase than a month ago means inflation has risen; especially in todays turbulent times}.


    Surely it would cost less (and create greater benefits) to employ competent staff instead of Jonathon Ross.

  • Comment number 36.

    Re: #12 DavidJWest

    It's not low rates (alone) that have caused the problems but the banks lending 5 x salary etc for a mortgage.

    If there was legislation in place (wake up FSA) limiting how much people could borrow, then we wouldn't be in this situation and house prices wouldn't have risen too far either.

    Rates are not the real issue here.


    The banks were prepared to lend 5x salary, as you say, because the associated payments were affordable. And the associated payments on a 5x salary mortgage were affordable because RATES WERE SO LOW.

    Rates are entirely the issue. While this sort of denial is so pervasive among the population, we stand very little chance of addressing this country's dire financial situation.

  • Comment number 37.

    Which is what I've been arguing here for weeks. HMG has lost control over the retail market by which they will be judged within the next year or so, there are two clear layers in the banking industry, separate them. That way there's a clear view of individual credit and corporate credit, and each can be sorted out separately. As HMG already owns a big chunk of the retail sector, and Lloyds are playing poodle for most of the rest, it must make a huge amount of sense, particularly to the Inland Revenue, to finish the job. That will effectively nationalise the black economy as well, boosting the figures back out of recession...at least on a statistical basis.
    As far as the corporate sector's concerned, killing some of the bubble-blowers also makes sense. The churn of the markets is so massively ahead of the true trading positions there's little possibility of avoiding such embarassing exposures as happened with Porsch-VW again unless they're reigned in royally, it starts to stabilise the balance sheets which are probably rather reminiscent of Barings' at year-end 1994, when Leeson reported profits of 102m, but was hiding a loss of around 200m versus 350m capital. However, by keeping digging, within the next two months he turned that 200m into 827m losses, uising exactly the same techniques used by the markets as a whole.
    The banks can thrash like fury as much as you like, but all they'll do is make the situation worse. It's time Inland Revenue, under NAO management, to audit every single bank's accounts as at 31.12.2008, transfer the audited accounts into a new set of books and then apply the Enron principle to any subsequent dealings in unaudited accounts - life sentences as an option to concrete boots in Canary Wharf.

  • Comment number 38.

    Taking a proper assessment of risk is applaudable. However I don;t see how this relates to not passing on a rate fall. The risk is represented by the margin between risk free (or base) rates and those offered. Not passing on the rate fall means this margin has increased, but that has happened becasue rates have fallen, not a new assessment of risk? Robert, you assessment only holds if a highly conicidental risk reassessment happned at 12pm yesterday to incredibly happen to conincide with the new risk free rate? The truth is the banks use delays in passing on rates as a way to make additional margin, the risk assessment is an entrely separate issue, that has already seen the cost of mortgages increase over the past number of months (including a massive growth in the fees cherged).

  • Comment number 39.

    Well put, but Ill ask the ? again which CofE
    put pressure on the Banks to offer cheap money in the first place

  • Comment number 40.

    How about a saver strike? If all of those people lucky enough to have savings were to withdraw the lot en masse from any bank which failed to pass on some of the savings the banks would learn quite quickly. The one thing consumers should have learnt from Northern Rock is that depositors can now dictate terms to the bank, not the other way round and maybe its time we exercised that power.

    They are quick enough to reduce interest on credit balances so all they are doing is extending their profit margin while shooting themselves, and us, in the foot.

    Same applies to the gas companies. gas is tied to oil , or so they said when they put swingeing increases on so when are we to see the reductions now oil has halved? Don't hold your breath waiting! The fat cats are alive and well and fiddling away while rome burns

  • Comment number 41.

    #5 "On the other hand, there is no excuse for lenders keeping their standard variable rates at or around 7%. Those lenders who do so should face the threat of legal action for extortion."

    Will the government sue them ?? And how will they prove extortion when the government themselves are the main cause by demanding 12% returns on their "loans" to the banks ??

    Perhaps the banks should add the 12% on top of the BofE rate of 3% and charge that 15% as the "government sponsored" rate !!

    Gormless Gordon's big mouth has put Darling in that most unenviable of position - between an immovable object and an irresistible force !! What's the betting he may go gaga from the stress ??

  • Comment number 42.

    I have absolutely no economics brain whatsoever, but from my background in science this seems to be a classic positive-feedback loop, so far with no sign of anything to correct it.

    What are the chances that a mass of savers will start withdrawing funds chasing the best of a bad bunch of rates and trigger a run?

    The banks can't afford to reduce rates for savers as they need all the depositors they can get, so there is no way they can pass on the full rate cut to borrowers and still 'reward' savers.

    Cutting rates for borrowers and maintaining rewarding rates for savers would be suicide, lowering rates for borrowers and savers would trigger a run. So status quo at best, no rate cut for borrowers and lower rates for savers at worst. And it is open to debate what impact, if any, an increase in borrowing would achieve other than a short respite followed by the points raised in #24.

    Seems that we've been pushing a large bolder up an ever-increasing gradient. The further we climb the heavier it gets and the weaker we become. The weakest of all developed economies according to the IMF, as we've been using unprecedented levels of personal debt to lever the boulder higher up the hill than anyone else, the inevitable consequence is that we'll be first back down to the bottom.

  • Comment number 43.

    Re: #32 fancythefunkymonkey

    4, We had low inflation figures because of the method which was introduced by labour back in 1997 (The CPI inflation calculator which doesn't include house prices - hence why house prices have gone up approx 300% since 1997).


    I agree with the other points you make, but the main reasons for the low inflation environment at the beginning of the millennium were twofold: a deflationary effect from the bursting of various bubbles (principally dot-com/stockmarket) and the importing of deflation from developing countries, principally China (manufactured goods), India (services) and new EC entrants, eg. Poland (workforce).

    That's not to say that I'm any sort of fan of New Labour or that I think CPI is a particularly good or appropriate way to measure inflation in the UK!

  • Comment number 44.

    #31 It is not just the old mortgages that will be affected by the rates and that is the crux of the problem. When many are talking about lending, it is not about just the mortgages *lent* but new loans, be they mortgages or business loans !!

    It is these new loans that will bear the SVR and if the borrower is not completely sound or cannot provide sufficient (and sufficiently good) security, the risks involved will be factored in. The days of "self-assessments" are over !! Even grandma's dentures may have to be thrown into the pot as security !!

  • Comment number 45.

    Giving the full rate cut to new customers may not be in the best interests of anyone, after all, do we need to fuel yet more debt based growth just to fend off a recession? That is certainly not going to be a tenable position for very long, and at some point in the time the debts have to be paid. However, it would be in both the interest of the banks and their customers to reduce the interest rate for those with outstanding mortgages and loans, as not doing so will in some cases lead into arrears and default, which would serve nobody, not even the banks. Why would they want to be lumbered with depreciating properties they most likely will have to take a loss on?

    A worrying things for me is that the fully taxpayers owned Northern Rock is punishing its own customers by giving very high and uncompetitive rates when they need to renew their mortgages in the supposed policy of forcing them to re-mortgage with a competitor, sadly, many if not most of them can't do that, so they end up with punitive rates of over 7.5%, no ability to move and the only option looming on the horizon is defaulting and loosing their homes. How stupid is the Govt. in not sorting this out? What benefit do we as a country gain from doing this? Surely the proper situation would be to offer competitive rates to them or else to actually ensure a move to another bank if they really want to wind business down, not punish their customers, who by dint of being taxpayers are also stakeholders.

  • Comment number 46.

    Rather than bailing out greedy, moronic, dullard bankers, the Government should have created a Taxpayer bank; preferably with someone having actual business nous heading it up, i.e. not Gordo!

    Most banks have, over the past few days, removed every trace of tracker mortgages, and so far (I think) only one big bank has cut its SVR. Fees for fixed rates are now exorbitant, making some of the rates themselves utterly pointless, as the fee costs more than the extra interest. This is not good business practice however you look at it. It's synical, short-sighted, shambolic and they should all be brought to book!

    There should now not be a mortgage rate of more than 5.5%, for those who represent little risk to the bank. Headline rates should likely be somewhere between 4.5% and 5.0%, but, as it should always have been, each mortgage should be assessed case-by-case by a competent advisor, not someone with nothing more than a couple of months training behind them.

  • Comment number 47.

    Surely the problem was not the interest margins that charged but the ridiculous loan to values that the Banks lent on.
    There is no rationale reason for there to be a greater differential between 3m libor and base rate today than there was yesterday

  • Comment number 48.

    So if I read this correctly the BoE rate is meaningless! They might well of cut it to 0%, or less, it makes no difference. So what exactly is the point of MPC if rate setting is not only not followed, it is not even expected to be followed. Jeez.

    As for the interest issue from the banks perspective are you also telling me that underwriting all that these clearly idiot banks borrow is worth just 2% interest? Oh that the bank would lend to an insolvent individual at 2%.

  • Comment number 49.

    All we are seeing is the fact there is no quick fix. If there is a very big hole it is difficult to fill and the taxpayers money remains light against the true size of the problem. There remains an amount of political posture which ignores the reality of the situation. A lack of progress at the rate the politicans want will come back to haunt them.

  • Comment number 50.

    Increase Interest rates and decrease taxes

    MAKE people SAVE for their SUPPERS and not SPREAD their small salarys over years of high interest rates in a lower base rate economy.

    People do not have the ability to borrow
    on

    1. Their assets (houses)
    2. Their careers(strudents)
    3. Their fraud
    4. Their salaries

    Banks can not have the ability to lend on

    1. Cheap interest rates
    2. Large multiples
    3. secure jobs
    4. Sound balance sheets

    You have to change the model. Period

  • Comment number 51.

    Re: #33 sal196

    #24 and others

    It sounds wrong that since low interest rates and cheap credit caused the problem, that low interest rates and cheap credit are the solution.

    But November 2008 is not April 2007. In the heady pre-crunch days, the excesses needed curbing. Now the pendulum has swung too far the other way and no one wants to lend any money or buy anything.

    What we need now is ways to stimulate the economy, not slamming the credit door shut. That is what caused the Great Depression.


    You finally hit the nail on the head in your final paragraph. But lower interest rates won't increase the availability of credit, and therefore won't stimulate the economy - even Mervyn King publicly acknowledged this several months ago. Look what happened to the banks last time they increased the availability of credit at ever lower rates. As Einstein said, insanity is doing the same thing over and over again and expecting different results. So no, the cause of the problem cannot also be the solution.

    Higher rates will lead to increased credit availability (albeit more expensive credit). Lower rates will lead to reduced credit availability. Go back to my engine lubrication analogy in post #27.

  • Comment number 52.

    Let see if commercial banks can reduce interest rates:

    If you run a bank you have a fixed overhead. (or nearly fixed) You need to at least cover the cost of this overhead and return to your investors the return they demand.

    If interest rates are lowered and you are unable to increase liquidity (this is important) then you earn less money and so have less to cover your costs.

    So the higher the interest rate the better off you are. Now, if you could increase liquidity it would not matter you could just lend more to each person to maintain your income - but THIS IS EXACTLY WHAT GOT US INTO THIS PROBLEM!

    It seems that the Treasury, the Chancellor and the Prime Minister do not understand how a bank works, yet again. Nor have they learnt anything from the Credit Crunch.

    (PS If you reduce interest rates to savers you compound your problem of needing liquidity as savers will take money away!)

    In the short term interest rates may go down a bit but there must be the very clear understanding that rates must be very much higher if the economy is not to continue collapsing with another property bubble and far more serious credit crunch. That would be insane - but highly likely given the standard of intellect of the people at the helm.

    My guess is that a mini boom will be engineered long enough for Gordon Brown to get himself re-elected and them the real trouble starts.

    Why can't we have a National Government now rather than breaking the fundamental rule of when in a hole, stop digging?

    Lowering interest rates = digging a bigger hole!

  • Comment number 53.

    The fact that bank interest rates are reduced to 3.5% does not oblige the banks to lend to everyone who asks (regardless of their ability to repay). The point is that those who can reasonably be expected to meet repayments should benefit from the reduction on interest rates. The banks still have a responsibility to exercise judgement (and obtain accurate income information) before lending at whatever rate is in existence

  • Comment number 54.

    Anybody here fooled by Abbey Santander that they are reducing their rates. this from the bank that put them up intentionally the day before.

    Vote with your cash people. Abbey santander should be boycotted and all money withdrawn immediately. especially those of you from the B and B that were forced into the group.
    I know this mean a salary decrease for "our" Lewis, but lets face it he's got a bob or two anyway.

  • Comment number 55.

    The main control mechanism which the "Government" has for the economy is interest rates. If these are disconnected from the real economy then the true controllers of the economy are the banks.



  • Comment number 56.

    #40 "How about a saver strike? If all of those people lucky enough to have savings were to withdraw the lot en masse from any bank which failed to pass on some of the savings the banks would learn quite quickly."

    How brilliant !! Just what the banks want !! When the savers withdraw all their savings, the banks will gleefully point to this and demand more money from the government !! Meanwhile they will say that they have no more money to lend because those nasty, greedy savers have taken it all away !! It will also give them an excuse to jack up the interest rate of the old loans because there is no more cash !!

    Meanwhile, muggers and thieves will have a field day with all that cash floating about !! And when they spend their ill-gotten loot, they will revive the economy !!

    Solves the problem at one stroke !!

  • Comment number 57.

    This makes very interesting reading. I suppose the paradox is that, in taking a stake in the banks, we appear to have taken control of the means of production, but that the market is now so complex that no government is in a position to set the price of anything. After all, if the Government is going to borrow hundreds of billions of pounds, its role as a lender has to be seen as more than little diluted: beggars can't be choosers.
    In any case, it all comes back to one central problem: we depend upon the market; all our business models are based on the idea that we can and therefore should grow through debt. So we need to mend the market - but that market, as we understand it, only functions when making the kinds of decision which brought us low in the first place.
    The end product of that is always, in every cycle, traumatic - and perhaps more so if, as is the case now, the end of the cycle is delayed: we have more fat to burn off, and are less accustomed to slimming.
    Frighteningly, the answer may be to accept that there is no answer; averting a slump now may just be a way of magnifying the next wave.

    By the way, I have a good deal of sympathy for the thinking behind the idea of banning excessive borrowing. In some ways, however, you could argue that, in a capitalist society, access to credit is absolutely crucial to social mobility, whether in terms of launching a business or buying a house. Without big loans, no-one can become a home-owner, or own a business, who has not inherited the cash.
    Debt, in other words, is democratic.

  • Comment number 58.

    So the truth at last. It is about time that trying to run the economy through a geek committee fiddling with interest rates is seen as folly.



    The Government needs to take wide radical fiscal and regulatory measures to recover the economy and avoid mass unemployment and increased poverty.



    Tax cuts for low income families, increase minimum wage, reduce VAT to 15%, and balance by bringing in 50% and 60% marginal rates for the highly paid.



    Try credit unions for local small businesses, pump primed and underwritten by the Town Halls



    Hey it’s the 21st century not the last but one!

  • Comment number 59.

    Re: #45 HovellingHermit

    A worrying things for me is that the fully taxpayers owned Northern Rock is punishing its own customers by giving very high and uncompetitive rates when they need to renew their mortgages in the supposed policy of forcing them to re-mortgage with a competitor, sadly, many if not most of them can't do that, so they end up with punitive rates of over 7.5%, no ability to move and the only option looming on the horizon is defaulting and loosing their homes. How stupid is the Govt. in not sorting this out? What benefit do we as a country gain from doing this?


    Errr... house price deflation? Inflation is a BAD THING, wherever it exists. Lower house prices will be incredibly beneficial to the country's economy in the long term. Everyone seems very keen to pay less for everything they buy... EXCEPT HOUSES!!! I'm sure it's some sort of insanity...

  • Comment number 60.

    By delaying the cuts they are undermining the underlying assets that they are worried about PEOPLES HOUSES. If rates were cut there would be a smaller chance of loans being defaulted on and with prices already down 18% and cheap mortgages available property would start to look attractive again. If that was the case and people came back into the markets the banks underlying security would raise in value and be less of a millstone around their necks.

    Finally if Northern Rock cant see that keeping their SVR almost 1% higher than the rest of the prime market is causing them a greater headache with repossessions then its going to be a long dark haul. At least the one bank in public ownership should be forced to cut their rates (even if it is run at arms length)

    The Bank of England is autonimous but still managed to listen to the governments message loud and clear

  • Comment number 61.

    Do GB and AD read what Robert says I wonder.

    He is the only one who:

    1. Appears to understand what is happening

    and

    2. is able to explain it in simple language!

    It is worrying that neither politician seems to grasp that what they are doing simply wont work. No one can spin themselves out of this mess.

  • Comment number 62.

    Do the MPC know something that we don't?

    Not really - you can understand the cut if you change your frame of reference.

    The MPC have previously set Bank of England rates with a view to moving other interest rates and inflation. In the current climate LIBOR is running off-set from BoE rates. The excess bit of the 1.5 % cut is the MPC compensating for the difference between LIBOR and the Base rate.

    This 1.5 % cut is aimed at moving the cost of credit back to affordable levels in the real economy. This will take the squeeze off small businesses that now find themselves on the edge of folding and therefore will lessen the effects of the downturn on our economy as a whole.

    Well done MPC!


  • Comment number 63.

    To all of you that say LIBOR is the reason the banks haven't / won't drop their interest rates; you're right, but as more people have begun to see and hear these terms, the banks have started using them as a smokescreen. 3 Month LIBOR used to be around 25 basis points (0.25%) above the BoE base rate, it's now somewhere between 1.75% and 1.95% above base; a huge increase in the cost of borrowing for the banks. However, haven't we all, thanks to our Government, guaranteed inter-bank lending to the tune of £250 billion (or whatever the figure is). Surely then, there's no reason why there should still be so much risk priced into inter-bank lending, and LIBOR could drop back to something like 3.25 to 3.50 percent. This would create far greater liquidity, enabling banks to provide finance to low-risk business and individuals and lower rates.

  • Comment number 64.

    CHARGED LENDING RATES IE WHAT INTEREST IS ACTUALLY PAYABLE NEEDS TO BE AT LEAST 10%

    BANKS WOULD MAKE A MARGIN & NOT HAVE TO DO SILLY DERIVITIVE TRADING ETC.

    SAVERS WOULD RECEIVE A SENSIBLE AMOUNT CIRCA 6 to 7%.

    NO ONE SHOULD HAVE A CREDIT CARD WITH A LIMIT OVER £1000.

    BANKS SHOULD BE BANNED LENDING FOR HOLIDAYS (LIFESTYLE PERKS TO BOOST PERSONAL INCOME) IE PEOPLE SHOULD LIVE WITHIN THEIR MEANS.

    MORTGAGES SHOULD REVERT TO 2.5 TIMES FIRST INCOME AS A MAXIMUM.

  • Comment number 65.

    Of course the banks should view mortgage and loans applications with a realistic view that the debt can be managed.

    The problem that I and others have is that the banks should not be allowed to increase prices, provide mortgages and loans at higher rates, increase charges to businesses etc. IN ORDER TO get their profit margins back to the same high levels that they were before the credit crunch.

    The banks should be penalised by having their profits capped at a realistic level, thus there will be no incentive to overcharge for basic services.

    The banks should not be allowed to penalise people and charge high rates for services when their greed caused most of the problems in the first place!

  • Comment number 66.

    At 12:54pm on 07 Nov 2008, YummyCarolKirkwood wrote

    Everyone seems very keen to pay less for everything they buy... EXCEPT HOUSES!!! I'm sure it's some sort of insanity...



    No its years of being brainwashed into using houses as already filled up piggybanks and edifici that return better yields than pensions.

    I know people that tapped their piggy four or 5 times to supplement their spending and have a mansion room of furniture rotting outside their newly rented caravan


  • Comment number 67.

    Do we have one too many banks? Let one fail as an example to the others, make them realise they need to start lending otherwise their main raison d'etre no longer applies.

    What is the point of MPC if no regard paid to them?

  • Comment number 68.

    Re: #63 HackedOrf

    However, haven't we all, thanks to our Government, guaranteed inter-bank lending to the tune of £250 billion (or whatever the figure is). Surely then, there's no reason why there should still be so much risk priced into inter-bank lending, and LIBOR could drop back to something like 3.25 to 3.50 percent.


    No reason? Hmmm... unless, of course, the problems the banks face are far in excess of £250 billion...

  • Comment number 69.

    HOUSE PRICES?

    TAKE SALFORD IN GREATER MANCHESTER

    1997 AVERAGE TERRACE £12 to 15K

    2007 AVERAGE TERRACE £90 to 130K

    OVER THE DECADE THE CONDITION OF THE HOUSING STOCK HAS DETERIORATED FROM AN APPALLING STARTING POINT.

    IF YOU BOUGHT A NEW WASHING MACHINE IN 1997 WOULD YOU EXPECT TO GET SEVEN PLUS TIMES WHAT YOU PAID FOR IT IN 2007?
    I DONT THINK SO.

    VAST AREAS OF SALFORD IN 1997 JUST NEEDED A BALL & CHAIN,THEY STILL DO IN 2007.

    SO PLEASE MR CLUNKING FISTER TELL ME WHERE THE VALUE IS????

  • Comment number 70.

    #59 - The market is deflating house prices nicely, I am talking about a small percentage of the market which is NOT going to have any major impact on the general movement of house prices. However, if these people can't pay the extortionate rates, they loose their homes and in the end it is going to be the taxpayer who ends up with the cost, not only the tangible one of helping to sort out a now homeless family, but also of the extra costs in terms of probably relationship breakups, the impact on children etc.

    I am more than happy for "commercial" banks if we still have any to do what they think right for them, but when you have a taxpayer owned bank like Northern Rock putting up rates which might be intended to reduce their customer base and not be competitive with their rivals so as not to offend Brussels, then the human cost is simply not morally right.

    If they give this hight rate to NEW customers only, then I wouldn't give a fig, but its existing customers who are coming up to the end of their current mortgage arrangements and need to renew and are finding that they are being punished for the bank now being nationalised.

  • Comment number 71.

    With this bail out in full swing with public money. I dont hear of any fat salaries being reduced!! or am i not reading the right papers. surely it was the fat bonuses and high salaries that contributed to the mess we are all in. we should not allow those who caused this to slip silently into the mist.

  • Comment number 72.

    Sorry Robert but your wrong. The main reason we are in this mess, was not because we were all given credit too cheaply. It was caused by the big bonuses on offer for the sub-prime loans. In the sub-prime market in the states, mortgages were approved without checking the true value of the property or the ability of the borrower to pay the repayments. This in turn was turned into stocks and our banks bought into the bad debt with less checks on their investment than if I'd called into my local branch for a £20,000 loan! They we're happy to take their big bonuses for being so bl**dy clever but now it's all gone sour it's someone else's fault! Don't you dare sugest the average British bank customer had any part of this mess. The finger points firmly at those in charge. And speaking of those in charge: why are they still in a job?

  • Comment number 73.

    Isn't it strange that with all the importance attached to LIBOR (which we are now beginning to understand), there is no information about it in the BBC's Market Data pages?

    How about a rate, and graph, for overnight and 3-month sterling?

    That way it will inform us what's going on and - you never know - it might make the market more transparent.

  • Comment number 74.

    The LIBOR rate is for 3 month UNSECURED bank borrowing from other banks. Why on earth are they borrowing expensive unsecured money when the BOE has guaranteed that loans taken on by the banks will be repaid??? They should be getting all or most of their money at secured rates.

  • Comment number 75.

    Re: #65 michaeld99

    The banks should be penalised by having their profits capped at a realistic level, thus there will be no incentive to overcharge for basic services.


    But don't we all benefit from the profitability of the banks through corporation tax receipts? And doesn't competition mean that proft levels are controlled?

    Which leads me to wonder: what will happen when Lloyds and HBOS have merged...

  • Comment number 76.



    MESSRS DARLING AND THE CLUNKING FIST ARE THE AUTHORS OF THIS LATEST WHEEZE THATS SO OBVIOUS.

    THE ECONOMY HAS NEVER REALLY CHANGED OVER 11 YEARS JUST BORROWING HAS SPUN OUT OF CONTROL TO CREATE A MIRAGE.

    TRUE UNEMPLOYMENT IS AS BAD AS 1997 IN MANY WAYS WORSE IE 2.74M ON INCAP BENEFIT 600K NOT IN EDUCATION OR EMPLOYMENT 1.7M UNEMPLOYED ABOUT ANOTHER 1M OFF THE SYSTEM IE OVER 55,
    THERES ANOTHER 1.3M LONG TERM UNEMPLOYED,A FURTHER 800/900K IN PHONEY EMPLOYMENT.

    THEN IF YOU FACTOR IN THE PEOPLE WHO DISH OUT MEANS TESTED BENEFIT TAX CREDIT PENSION CREDIT ETC THE VARIOUS BOGUS AGENCY OPERATIONS IE CRB THE NEW ID PROJECTS I COULD GO ON & ON.



  • Comment number 77.

    Re: #67 dbglossop

    Let one fail as an example to the others, make them realise they need to start lending otherwise their main raison d'etre no longer applies.


    Exactly! After all, it's not as if lending was what brought the entire sector to the brink of failing...

    8-)

  • Comment number 78.

    This should be an opportunity for us to apply some common sense. We have seen almost evryone blamed but ourselves. How many people, when offered the chance to make outrageous profit (or bonuses) would have refused? How many of us, when told we could have as many credit cards as we wanted, or a mortgage for five times our salary, said 'no thanks, i'll just stick with what i can afford to pay? I realise that it would be difficult to fund the high life on an average salary, but we have been duped into thinking we can fund it by borrowing. the responsibility for the crisis lies with us, and we can regulate the banking industry ourselves, by the simple expedient of only borrowing what we can safely afford to pay back. This would inevitably lead to a drop in standards for some, but surely this would be better that this constant cycle of crash and burn, and us having to pick up the tab?

  • Comment number 79.

    Call me cynical but the banks are sitting on our money to make their balance sheets look good, better balance sheet = bigger bonus!
    It's time to move on from crisis management to how we got a £652 billion bubble ( Roberts post Oct 10th ) while the FSA snoozed.
    It's disappointing that so few senior figures have had the guts to resign so far, we need a wide ranging public enquiry into the Banks conduct, some of those who made 'bonus' driven choices should be going to jail.

  • Comment number 80.

    Can someone pick up on post 26 regarding fractional reserve banking and how the actual rates are irrelevant and discuss this please.

    It seems to make perfect sense to me but then again i may not have the knowledge of many other posters...

  • Comment number 81.

    ON THE SUBJECT OF BROWN & DARLINGS DICTATORSHIP STYLE OF GOVERNMENT.

    I DID 5 TRADES SHORTING HBOS STOCK AND MADE OVER £38 MILLION,NATURALLY OTHERS LOST TO FUND MY GAIN.

    NOW I AM NOT ALLOWED TO DO THAT AGAIN WITH BANK STOCKS.

    IT WAS A GREAT BOOST TO HELP SEE OUR BUSINESS THROUGH THE BROWN CLUNKING FIST DEPRESSSION.

  • Comment number 82.

    Re: #70 HovellingHermit

    If they give this hight rate to NEW customers only, then I wouldn't give a fig, but its existing customers who are coming up to the end of their current mortgage arrangements and need to renew and are finding that they are being punished for the bank now being nationalised.


    Sorry, I don't quite understand: why should people with mortgages have some sort of entitlement to cheap borrowing? In particular, why should they automatically have access to further low interest rate lending when the INTRODUCTORY low rate period comes to its end?

  • Comment number 83.

    Tired of reading all these comments on the problem. Can everyone please read the following solution and just get on with implementing it.
    First, convert all commercial debt in to long-term sovereign debt by obliging all banks within the reach of English and/or Scottish law to buy 10-year 10% government bonds for the full amount of all outstanding debt on their books. They can declare as much of it as bad debt as they like, but they still have to buy bonds for the full amount, except at 5% for the bad debt.
    'At a stroke', the government will have recovered all the taxpayers money it has thrown down the drain, and a bit of spin will enable it to be sold as a political masterstroke, gaining public support, credibility and control. All banks instantly become 'Good' banks.
    The economy must then be managed over the next ten years so that the 10% payout is effectively nullified by inflation. Classic zero-sum solution. Every one a winner. If it doesn't work, today's bunch of politicians will have gone anyway, so they have nothing to lose by trying it.
    Why will it work? Because time is factored in to the solution. Now if we could factor in responsibility and integrity, we could also stop the problem ever reurring in the future. Utopia.

  • Comment number 84.

    Did lending not always used to be BoEr+2% more or less before the credit boom i.e. the SVR.

    Will this rate reduction help if people are on fixed rate, so do not get the benefit of the rates coming down. Plus don't some of the tracker deals have a fixed bottom 2.75%BoEr plus 1% to ensure a profitable return for the bank. Therefore 3.75-4% must be the absolute minimum lending rate, why would a saver or institutional investor provide the capital when you could get a better yield in an defensive FTSE 100 company plus have some upside potential in capital gain. Plus if the new equity loan ratio is poor because the value of the price has fallen the 125% brigade are stuck on the SVR of the existing lender.

  • Comment number 85.

    I can see a lot of sense in the approach of leaving interests rates relatively high (1-2% above inflation?) and instead boosting the economy via tax cuts/handouts to those on low/middle incomes. That would have a much more immediate and direct effect on consumer spending.

    However it is problematic to keep interest rates higher than our competitors. That's essentially what we've done for the past three decades, causing Sterling to be chronically overvalued, killing off our manufacturing industry, making us dependant on imports and in general explaining why this recession will hit Britain harder than most countries.

    There really needs to be some global agreement that the way out of this is to directly boost the spending power of those on low/middle incomes (paid for in part by borrowing, in part by increasing taxes on the Rich as Obama is proposing).

  • Comment number 86.

    Thanks. I've been commenting that I thought the banks were being sensible. Glad to see you writing about that.

    If the 1% drop in Libor is passed on to customers, that's fair enough. Hope the Bank of England puts rates up again, to look after PRUDENT Savers, when the margin between LIBOR and the BoE base rate has narrowed further...

  • Comment number 87.

    #70 "If they give this hight rate to NEW customers only, then I wouldn't give a fig, but its existing customers who are coming up to the end of their current mortgage arrangements and need to renew and are finding that they are being punished for the bank now being nationalised."

    This is because the government is like Janus. One face says, the "people" must be given all the money they want and the other face says the banks must pay exorbitantly for the loans they get from the government !!

    NR bosses are only obeying government orders. Therefore, the ultimate responsibility lies with the government for ordering the current mortgage holders to be turfed out !!

    The government could just as easily order them to keep lending at unrealistic rates and make whacking great losses !!

  • Comment number 88.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 89.

    CLUNKER BROWN GET YOUR COAT YOUR PULLED.

  • Comment number 90.



    So where up the creek without a paddle

    The us of a has,nt sneezed but as a very
    bad case of flu. as we are set to be hit
    twice as hard as them by this tusami, it
    really is the end of this once great nation
    as we know it.

    GB will go down in history, but not for
    saving the banks, but for bringing us all
    down to our knees

    TIME FOR THE RAG AND BONE MAN

  • Comment number 91.

    It's all very well for the Monetary Policy Committee to change the Bank of England Base Rate from 4.5% to 3.0%.

    Unfortunately, the Banks have a difficult choice. If they reduce the rates at which they lend, they must also reduce the rates at which they borrow from their depositors/savers!

    Gordon Brown may huff and puff about banks implementing cuts in lending rates but he says pretty little for the benefit of savers! Governments, of course, are not much good at saving, only spending, so they have little sympathy for those who rely on savings interest to pay their way!

  • Comment number 92.

    Banks have priced in credit risk in the past, whether they have charged enough for that risk is another matter. The crux of this is that whereas the world was awash with cheap credit 18 months ago, so that enterprising lenders like Northern Rock were able to pass on to customers as very reasonably priced mortgages, those "happy" days are replaced now by a time where credit is scarce and inevitably more expensive and more selectively available. And Northern Rock wasn't irresponsible in its lending - look at the evidence given by the FSA to the House recently. Northern Rock was left exposed by the BOE with its fixation on "Moral Hazzard" when the credit markets dried up - I wonder if they'd take the same view now if the same circumstances arose?

    The banks have been recapitalised to a high level with taxpayers money. however the taxpayer is charging 12% for that rescue. The Government is being disingenuous in demanding the Banks cut lending rates when they know only too well the massive risks the banks face as we enter a recession. A recession, by the way, that the Government told us wouldn't happen as they'd abolished boom and bust. The government know too that the cost of obtaining funds from the retail and wholesale markets is still very high. But foget the detail, ignore the facts, carry on with bluster and spin - its Gordon's way - and if you say it often enough some will actually believe it. That doesn't make it sensible for the banks to kowtow to the government - in fact they'd be fools to do so.

  • Comment number 93.

    BTW Robert, this is a nice explanation of what's going on. One missing piece of the jigsaw though. "...money managers believe the risk of lending to banks has risen very sharply, and they therefore want to be compensated for that additional risk".

    OK, that makes sense, but only if there is somewhere else safer where they can put the money instead. So where are they putting it? Presumably not under their matresses. Is it all going into Government Bonds (which governments are selling in order to finance the bank bailouts)?

  • Comment number 94.

    Question:

    How does one get a bank to do what their told?

    Answer:

    Under the ‘Treating Customers Fairly’ banner of the FSA , threaten to revoke their banking licence!

  • Comment number 95.

    "Spare a thought for those poor misunderstood chaps who run our big banks!!" ...............You have got to be joking....... they are far from poor, most are on 6 & 7 figure salaries, and have earned that, for being totally inefficient at their jobs. Unfortunately Mr Brown and his government, also key contributors to the situation we are in, will not step in and remove these people, even though billions of taxpayers money is now proppong up the banks. Amazingly we are supposed to sit back now and let these same money grabbing men get us out of this situation ...... they should be on the dole now ...........no golden handshakes!!
    Unfortunately we have a country run by people who like to keep their heads in the sand. The country has been in recession for at least 18 months, and the credit crunch has been on the cards, to all but a blind man, for the last 3 or 4 years. You can not just keep handing out credit to people who have no hope of repaying, just to keep the economy boosted. The people I feel sorry for, are the ones who have been cautious with their money. They took a mortgage they could afford, they brought things when they'd the money to pay for them, and lived within their means. Sadly they have to sit back now and watch the rates on their savings plummet, and see thousands of people get their self made debts being written off!! The government and banks should be offering the cautious people some sort of incentive as well!!!

  • Comment number 96.

    This rate cut is nothing more than a political smokescreen so GB and Darling can deflect the heat away from them. They and the BOE know very well the banks can't pass the rate cut on when it bears no correlation to their cost of funds.
    Buried in the BOE's recent Financial Stability Report was the bombshell that even after the recapitalisations, the UK banks will still need to deleverage by 17 per cent - wait til that hits the real economy - how many businesses will find that when their facilities come up for review in 2009 there is no money - and what is available will be at a v high price.

  • Comment number 97.

    It would seem that the government is trying to gain political mileage by encouraging this bank bashing.
    They know full well that banks can no longer go by the Bank of England rate but continue to tell us the public that they should.
    I agree that there should be a fall in interest rates but the banks need to be extremely cautious about who they lend to.
    There are many individuals and businesses in deep trouble who will only leave the banks with more bad debt.
    Not a situation to be encouraged or this recession could go on forever.
    The more politicised this recession becomes the worse it will get.
    Pity we can't take the politicians out of the equation altogether.

  • Comment number 98.

    In the old days when Bank salaries were lower than other salaries, the banks provided very cheap mortgages to their employees. I am sure that todays top bankers not only get huge salaries, huge bonuses, generous pensions and still get the subsidised mortgages. These people are totally insulated from the real world, just like our Shadow Cabinet who cannot exist on 60,000 pounds a year plus expenses. It's time for Bankers to reenter the real world. The thought that some redundant bankers are turning to teaching is a source of real pleasure. Enjoy.

  • Comment number 99.

    Could we not have a profit making public itility, simply by lending the money direct to the public through already nationalised banks like Northern Rock?

  • Comment number 100.

    "Where as it's wholly rational for any individual bank to take a much more cautious and conservative approach to lending, it's wholly irrational for all of them to do so at precisely the same time, especially when the economy is so weak." - Robert Peston

    Explain this unsubstantiated assertion. Many readers have good reason to view it as false. Dropping such an obvious non sequitur into a piece of journalism demands a robust defence.

    Also, rates quoted to lenders and borrowers depend on credit risk more than on a central bank's TARGET rate or actual cost of funding, that is why there is always a spread. While it is good of you to even mention there is a difference between them, you assume that moving a target rate will move the actual cost of funding for all institutions by roughly the same amount in the same direction, and that the credit risk inherent in all borrowing, particularly depreciating nonproductive assets such as housing, could possibly remain at the very least constant.

    This is not the case. Evaluation of credit risk on residential property lending has been the subject of complacent neglect for far too long, and estimates of what it is are increasing one quarter after another. The true cost of mortgage credit is far higher than it is today and there is nothing the Bank of England can do about it. Nor can it do much to lower the cost of funding for institutions whose creditors demand higher renumeration all at once and are willing to shop around for better offers.

    It is simple business sense: if you cannot offer your creditors competitive rates, they will take their business elsewhere, if you cannot charge your debtors enough to cover your risk exposure, you will sink once enough of them default. Both are going up. These target rate games are almost beside the point.

 

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