Britannia Radio

Despite what the tabloid press make headlines of the truth is much 
nastyier and more complex./  The Banks cannot match cuts in Bank Rate 
since their costs have little directly to do with it.  But Gordon 
Brown, the Daily Express, and Gordon Brown and the Daily Mail and 
Gordon Brown and the Daily Mirror call on the banks to pass on the 
cut in full.  But the banks don't want to commit suicide!

This is a basic explanation of how it works and well worth reading

XXXXXXXXXXXXXX CS
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SUNDAY TELEGRAPH    7.12.08
My new rule for recessions: don't bank on public understanding
Even in times like these, when the only adjectives that seem to be 
appropriate are "transformational", "seismic" or "unprecedented", a 
week that saw a Queen's speech followed by the Bank of England 
reducing the bank rate to the lowest for some 57 years is dramatic in 
anyone's language.

By Angela Knight

Borrowers have been calling for lower interest rates for some time; 
savers, unsurprisingly, are getting very concerned as they have less 
income to live off from conventional savings accounts. This, in fact, 
encapsulates one of the dilemmas of the current situation - that what 
seems right for some is wrong for others.

Regardless, after each of these extraordinary rate cuts by the Bank 
of England - 2.5 per cent in total in five weeks, when the base rate 
usually moves by only 0.25 per cent at a time - the only follow-up 
question that has been asked is: will the banks pass the rate on to 
borrowers?

This question implies that the banks immediately benefit themselves 
from a cut in base rate, which they do not.

The cost of funds to the banks depends on a range of factors, such as 
what they pay savers to attract deposits, and the cost of money in 
the wholesale market as measured by the London interbank offer rate, 
or Libor for short. Before the credit crunch hit, the Libor rate was 
very close to the base rate, but now it is much higher because there 
is a shortage of money in the UK wholesale market.

The wholesale money market is very important, as Britain is not the 
nation of savers it once was. With those deposits no longer coming in 
as they had in the past, banks filled the gap by borrowing more on 
the then buoyant and cheap wholesale credit markets. This translated 
into low-priced lending to customers of all kinds.


In addition, banks were also able to keep the price of credit down by 
packaging up debt and selling it on through the securitisation 
process. This was effective until the securitisation market became 
infected by exposure to defaulting American sub-prime mortgages, and 
the value of the more complex securitisations became difficult to 
assess under new "mark to market" accounting rules. Confidence 
evaporated and a prime source of providing funding and spreading risk 
dried up.

With these problems came a greater than normal spread between the 
Bank of England's base rate and Libor. So, when the base rate was 
reduced by 1 per cent on Thursday, the key Libor rate reduced by only 
0.3 per cent.
There are also the costs of doing business to consider: the 
employees, the branches, the call centres, and, lastly, the cost of 
the losses as rising numbers of borrowers are unable to pay their debts.

This all obviously needs to be taken into account by banks when 
calculating what rate changes they make when the Bank of England cuts 
base rates; they must also consider those who save with them.

Many who call on banks to "pass it on" are unaware of these issues; 
others, for various reasons, choose to ignore them. That is of no 
help to borrowers as it gives them false expectations - and it does 
nothing for savers either, many of whom are retired and rely on their 
savings.

The global credit crunch is impacting on all countries, but the 
degree of the impact relates in part to the extent of indebtedness - 
and in the UK we owe more per person than most of our competitor 
countries. Yet we are not being pressed to cut back: on the contrary, 
Government policies (such as the fiscal stimulus package) aim to 
ensure banks continue to lend and to make credit available at last 
year's levels, so that people continue to spend and minimise the 
impact of the recession.

The £37 billion stabilisation package for some banks means they have 
to hold more capital rather than use it to support new lending. [AND 
she does't mention that this £37 bn attracts interest payments of no 
less than £4.4bn a year which is a cost to be passed on to borrowers -
cs] Yet responsible lending to individuals and viable businesses is 
still taking place and at reasonable levels despite the perceptions 
to the contrary.

There are calls, for example, for the banks to make more mortgages 
available. Yet, while there were more than 100 mortgage lenders 18 
months ago, now only the major banks and a handful of building 
societies are active in this market. The result is that large numbers 
of re-mortgages are being granted as the other lenders exit the 
market. These, plus new mortgages, come from the six major banks. The 
story is similar when it comes to small and medium-sized enterprises 
- the lending by the major banks has been maintained. Many other 
lenders, though, such as the Icelandic banks, are simply no longer 
there. It really is only the mainstream lenders that are now able and 
willing to lend to viable businesses.

 From working through past recessions, I have learned four key 
points. First, recessions are nasty. Second, it is those businesses 
that cut costs and become more competitive that will survive. Often 
what small business in particular needs is advice of what changes to 
make, as there is still business to be done in a recession. Third, 
politicians can help, particularly if they concentrate on measures to 
help business, employment and so job security. Fourth, recessions do 
pass.

On this occasion, it is important to add a fifth point: when it comes 
to the banks, it might be uncomfortable, but we would do better to 
understand a little more before leaping to instant condemnation.
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Angela Knight is chief executive of the British Bankers' Association