23 October 2017

Devil's Advocate

Roger Elwell - Yes Please

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Politicians Out Of Touch, Or Making Mischief...?

07 November 2008  |  1808 views  |  0

Gordon Brown should know better (and so should David Cameron, for that matter).

GB has conducted a press conference this morning calling for the banks to reduce rates now that the BoE has done so.  Furthermore, he cites the government's capital injection into the banks as one reason for this (i.e. that they should now do their bit).

This is disingenuous for a number of reasons:

1) He talks about the capital investment was if it has already been done.  He knows as well as I do that this is far from the case.  The banks haven't had a penny more in capital yet, from anyone, and won't do so until the rights issues are a) signed off by shareholders (which might not happen in their current form) and b) then offered, bought and completed.  None of this has happened yet and he should therefore not keep speaking as if it has.  He (and Cameron, and all the other politicians) should stop misinforming the public.

2) He knows as well as I do that Base Rate has little effect on the costs of funding for banks these days.  Those costs are determined more by LIBOR, which is driven by the availability of funds generally - and not necessarily just between banks, as some of the funding comes from large investing institutions.  Only if LIBOR comes down can banks reduce rates, because otherwise they'll lose money (and thus diminish their capital base).

3) He also knows that many people have fixed rate mortgages, which are typically funded by matched deals between the lending institution and the market.  Those people on fixed rates won't see any change and therefore won't benefit from these rate reductions.

4) As for much of the banks' other funding, it comes from customer deposits.  he must have noticed that, recently, lots of money has been placed in savings accounts at fixed rates - 6, 12 and 24 month deals.  Many of those rates are way above the new Base Rate (indeed, I saw an advert for a 6 months fixed deposit at 6% only yesterday).  Also, to attract money, they are paying rates on instant access accounts which are way above Base.  This will have the effect of raising the average funding costs of the banks and further cut the link between Base and the banks.

In the long run, it does nobody any good to mislead people to the extent that all politicians are doing so at the moment.  If they really misunderstand how finance works to the extent that their pronouncements demonstrate, then we should all worry.  If not, and they are simply misleading to make political capital, that is shameful and will damage the financial services industry still further in the long run - an industry in which the taxpayer may - yes, only 'may' at this point - have a significant direct stake within the next 3 months.

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member since 2008
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Consulting to the financial services industry with a specific expertise in the cards business - issuing and acquiring.

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