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Banks were thrown into fresh controversy over excess profits after it emerged that the spread between their cost of borrowing and the interest rates they levy on businesses and homeowners has rocketed to new highs.
Figures compiled by the Evening Standard reveal the difference between the three-month Libor, the London inter-bank offered rate, and the average interest rate charged on mortgages has shot up to 3.7%, almost seven times higher than the difference recorded this time last year.
The figures pile further pressure on Chancellor Alistair Darling to do more to force banks to lend at affordable rates. They came amid rising public alarm at banks' quick return to multi-billion-pound profits.
Consumer group Which? condemned the spread, which it described as “significantly higher than it's ever been before”. Spokesman Vera Cottrell said: “It's clear that banks are making the most of the lack of competition in the lending market to boost their profit margins and it's coming at the expense of consumers.”
The picture is even worse for business customers, where the spread can commonly be as high as 7.12%. Critics said the staggeringly large number shows how easy it is in the current environment for banks to make huge profits at the expense of customers.
Darling recently said he was “extremely concerned at what the banks are doing for the small and medium-sized companies” but has come under fire for taking little forceful action against the lenders.
Barclays and HSBC posted half-year pre-tax profits of £3 billion last week, and, like all the banks, have access to cheaper-than-ever funds, while their customers are charged interest rates close to 10 times higher.
Libor, the rate at which banks lend to each other, fell to fresh lows of 0.84875% on Friday but critics say the drop was still not passed on to customers. Enterprise groups accused banks of exploitation.
Stephen Alambritis, spokesman for the Federal of Small Businesses, said: “We want banks to make money but they should have some humility and use some of their profits to return to relationship banking, which gives managers the chance to offer businesses commercial loans at a reasonable cost,” he said. More than 70% of the FSB's members reported banks have pushed up the price of their credit by up to 7% in the past two months.
The British Bankers' Association blamed the disparity on the rising costs of running a bank. The BBA's Brian Mairs said: “The cheap credit of recent years was not sustainable and we do not believe anybody reasonably expects it to return. Borrowing is riskier. More people default. Banks take longer to get their money back as they help customers by rescheduling repayments. To try to restore lending costs to pre-credit crunch levels would simply prolong the recession.”
The news comes amid signs that the cost of mortgages is threatening to overwhelm growing numbers of borrowers. Government-owned Northern Rock, which admitted this week it will fall about £1 billion short of its £5 billion mortgage-lending target for 2009, warned that 40% of its borrowers have fallen into negative equity.
The Financial Services Authority's latest lending statistics saw repossessions in the first quarter of 2009, soaring 62% on last year's level, to 14,825.
Reader views (16)
If you think an average 4% mortgage is expensive then you were not a borrower in the 90's .Under Thatcher I was paying 15% for my mortgage and Norman Lamont as tory cChancellor but up rates 3 times in one day to over 15%!.
All I can say is that after the recent financial crisis (irrespective of who you blame) it is right that banks restore their capital base, and that means that they lend at reasonable rates, and 4-5% for a mortgage seems reasonable. If you cannot afford the interest rate then dont borrow!Its so easy to walk away from debt these days that the rest of us end up paying for the feckless.
As for credit card interest rates of 9%, that's nothing to what I was paying in the 90's, try 29% !!
Its really about time borrowers stopped bleating and get on with paying down their debts down like everyone else. Its time to wake up to a new world of austerity, learn to live within your means or go without.
The reality is its going to get a lot harder so the sooner you realise that interest rates will have to go up the sooner you will get to grips and start taking some personal responsibility!!
- Sam, London, 02/09/2009 13:28
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Of course Banks are profiteering from Lending to the consumer, (and borrowing in the form of deposit accounts). I recently had a letter from one of my credit card issuers stating that they were increasing the rate of interest from 9.9% to 14.5%APR "due to current market conditions" The assured me that this was not to do with my Credit Status. Now if that isn't profiteering when they are borrowing at arond 1% pa; what is?
In any other business the Directors of the Banks would have been called in to Court for wrongful trading. The bad debts which they are crying about, are self inflicted.
As a debt collector, I come across a lot of ordinary people on salaries of less than £10K, struggling to meet their debts, not as the Governemtn would like to portray, that these people are greedy, but in some cases the interest they are charged is disproportionate to Base Rate, or LIBOR come to that.
More Banks are strangling businesses by unnecessary foreclosure when proper management assistance could be given. Banks have forgotten that they are there to provide a service, not as they have become- quite literally retail banks, no better than "Top-Shop".
- The Debt Collector, Chlemsford , England, 26/08/2009 12:29
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With respect to all of the comments here, there seems to be a fairly fundamental misunderstanding of how yield curves work. Banks borrow short and lend long - LIBOR is a measure of 3 month interbank money. We are talking about 20-30 year mortgages when we think about this spread. Currently, GOVERNMENT debt (Sterling Gilts) trade at between 4.1% and 4.2% for the 15 year through 30 year maturities. So the government itself cannot borrow at least than 4.2% for 30 years, a spread of about 3.5% versus 3 month LIBOR.
Why would anyone expect a consumer or business to be able to borrow more cheaply than the UK government, notwithstanding the enormous fiscal deficit it is running?
In order to hedge the duration mismatch that a bank has, it would need to either trade in Gilts or (more likely) use interest-rate swaps. Those will trade even higher than the Gilts.
Does anyone need reminding that the financial crisis effectively started because banks and other financial institutions were lending for 25 years and borrowing for 3 months against it, so when the 3 month borrowing market dried up they were left in a big mess? Surely that strategy can't be considered to be "good" going forward!
- Anon, London, UK, 14/08/2009 11:58
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only thing banks are good for is paying corporate tax.
- Lee, Kentish town London, 10/08/2009 17:18
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One wonders why the US and UK bothered going to war in Iraq and Afganistan when our current most threatening enemy is right here, the financial sector, has destroyed so much of our livelihoods from within and whose threat is now even greater because they (and we belatedly) now know that the taxpayer will always pick up the tab.
Governments who helped cause the problems are incapable of changing bankers behaviors to reduce the risk to us.
However we can by shunning and avoiding them on a one to one basis - personal, hostile and unfair I know but if the greed of a large group of people can destroy my business (which they have) I have no problem staying well clear of them and anyone associated to them.
Being rich and totally ostrasized by society loses its appeal after a while.
- Jim, London, 10/08/2009 14:14
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Why bonuses? You pay the head of RBS his £1.6mill annual salary, set a reasonable target and if he does not come up with the goods you sack him. That should be enough incentive for anyone.
- Ayliff A Mcnab, Orihuela Costa,, 10/08/2009 13:38
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OK Ian so banks should make some profit but they don’t need to charge interest at 8 9, 10% above what they have to. I’m a smallbusiness owner and we’re getting squeezed out by rates. It’s ridiculous and needs to stop.
- Laura, Cobham Surrey, 10/08/2009 13:26
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Bankers are like fleas; if you feed them, they will multiply; and like all blood suckers; they need victims to live off.
- Mickinlondon, london., 10/08/2009 13:11
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Making profits, surely that their job!
The only dumb thing is governments getting involved, why, just to stroke a small sector of voters that might have lost their jobs through inept management.
- Ian, Reading, England, 10/08/2009 12:44
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nothing surprises me with this gutless government......when is the expenses scandal coming to the law courts??? anyone?
- Rsaviour, london, 10/08/2009 12:37
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I agree entirely with the mood of previous posts.
Time to see the good old 'Jodrell-bankers' for what they always were - Glorified Moneylenders. -Plain and simple!
- Huggy, Cumbernauld Scotland, 10/08/2009 12:34
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The multi-billion pound profits will be made squeezing the taxpayer who has bailed out the banks and then paid to the bankers who have made such a complete hash of everthing. Come on guys. Don't you have any shame at all?
- Alex C, London, 10/08/2009 11:58
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Banks making money out of lending, whatever next????
err......
- Hansel, London, 10/08/2009 11:51
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it doesnt take a maths genius to work out that banks charging around 4.5% to 5% or more interest rates and borrowing at 1% - are making huge profits. Banks will make money on any type of lending they do - as long as borrowers continue with repayments.
- Ancient Wisdom, London, 10/08/2009 11:28
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Banks seem to think that past profits must be replicated at any cost even though as we have seen from exhorbitant charges, still to be respolved, miselling pYment protection and a bucket load of other areas the profits should never have been taken.
Teh losses attributed to the banks can not be forgotten and now more than ever we need a fresh start for European Bank Assurance style companies to take up the slack.
To trust the banks either individually let alone the continuous bull coming from the Britiush Bankers Association, given how they have decimated UK plc would be reprehensible.
The Treasury and the Bank of England should actively be encouraging Bank Assurance companies to set up on a large scale in the UK.
- Robert Marshall, LONDON, 10/08/2009 11:28
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Gosh, now there's a suprise. The American regulators claimed last week that the financial institutions in the USA appeared to be making money out of the Fed Reserve, due to the way it was regulated, so why shouldn't our own bandits do the same. Bonuses, shurely not driven by greed, or overcharging?
- Alan, carlisle uk, 10/08/2009 09:57
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