Sunday Mail discovers how banks work
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Headline in the Sunday Mail: “£44BILLION! The killing that banks are making from interest rate ruse”
“BRITAIN’S biggest lenders have raked in £44 billion as interest rates rise, by increasing borrowing rates by more than they pay savers, The Mail on Sunday can reveal.”
It seems Patrick Tooher has discovered how banks worked, and is outraged.
There is an interesting part in that banks don’t seem to need to raise their savings rates, which is interesting, but still…
I couldn’t read that article as you had to subscribe but it was the same in yesterday’s i paper under the headline “Banks rake in £4.8bn extra profits in ‘appalling rip-off’”. The article compared the “net interest income” from seven high street banks in 2022 compared with 2021, explaining
“Net interest income is the profit made by banks from charging higher interest borrowing costs on mortgages and loans, compared to what they pay out in interest on savings accounts.”
In other words, banks generate an income by borrowing at one rate of interest and lending at a higher rate, their profits being what is left after paying their running costs.
A table shows that between them the seven banks did have a “net interest income” higher by £4.8 billion in 2022 than in 2021. No doubt that would have been mainly due to not raising the interest rate paid to savers at the same time as they raised the rate they charged lenders (following an increase in the Bank rate).
But the total figures are also revealing. In 2021 their net interest was £27,998,000,000. In 2022 it was £32,761,000,000. The point is that there is no claim or pretence here that this was created out of thin air. It is clearly stated that it comes “from charging higher interest borrowing costs on mortgages and loans, compared to what they pay out in interest on savings accounts.”
Found a way to read that article in the Sunday Mail here:
The figures are different from those in the i paper — they are for six banks not seven, but even for those in common they are not the same. But the definition of “net interest income” is the same:
“the difference between what the companies charge borrowers for loans and mortgages and what is paid to savers in interest”.
Which they give as £44 billion, £8 billion more than in 2021.
In any event, both papers take it for granted that banks are financial intermediaries, borrowing money at one rate to lend at a higher one. Not, as one of those who commented claimed, companies that “magically make money with a pen stroke” and then lend it — if that was the case their income would be much, much higher as they wouldn’t have to pay anything to savers since they wouldn’t need any.
In any event, both papers take it for granted that banks are financial intermediaries, borrowing money at one rate to lend at a higher one. Not, as one of those who commented claimed, companies that “magically make money with a pen stroke” and then lend it — if that was the case their income would be much, much higher as they wouldn’t have to pay anything to savers since they wouldn’t need any.
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That is what the schools of Finance and Banking teach, and their textbooks says the same thing, that banks are financial intermediaries. In the past bank officers working in Metropolitan banking were always looking for depositors, and the main job of the credit analysts was to lend money at a higher interest. All the departments of all banks ( savings and commercial ) survive on fee income
So much do banks need deposits from savers that they compete with each other to attract them. They also compete for ordinary deposits on which they pay no interest as they can lend this money too. If banks really could create money “out of thin air” by a “pen stroke” then they wouldn’t need to.
Note that “net interest income” is not the sane as profits. It’s a bank’s income. A bank’s profits are this less their costs (buildings, wages, computer systems, etc).
John McDonnell calls for windfall tax on banks: a left-wing take on the situation: “Big five banks posted profits of about £37 billion for 2022. UK banks made extra £7 billion by refusing to pass on higher interest rates to savers.” At least calling to recoup that profit through targeted taxes makes some sense.
So much do banks need deposits from savers that they compete with each other to attract them. They also compete for ordinary deposits on which they pay no interest as they can lend this money too. If banks really could create money “out of thin air” by a “pen stroke” then they wouldn’t need to.
———————————————————————————Most savings and commercial banks offer the same products such as saving account , checking account , Certificate of deposit, letters of credit, personal loans, commercial loans, etc, but each one want to present themselves better than the other ones because they want to get all depositors and business to produce fee income.
Bank Officers used to have a long management trainee to get acquainted with all the products and services that they were offering, and their main job was to get depositors and offer them the best service because other banks were doing the same jobs in their own branches and operational departments, and every department generate fee income including national and international banking, and banks used to send their employee to study finance, accounting ( internal auditing ) law, marketing and banking
One wonders how many times this idea of creating money out of thin air has to be debunked. As Movimento notes, no sane banker or responsible treasury official takes it seriously. It isn’t taught in universities. It exists merely in the fevered imaginations of a few off-beam enthusiasts. Bless ’em.
One wonders how many times this idea of creating money out of thin air has to be debunked. As Movimento notes, no sane banker or responsible treasury official takes it seriously. It isn’t taught in universities. It exists merely in the fevered imaginations of a few off-beam enthusiasts. Bless ’em.
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Only ignorants can believe that. People do not believe in sciences, but they blindly follow politicians. It is similar to all the nonsenses spread about Covid 19 and the vaccines
Labour want to protect the banks, as ever
Well I mean: “Shadow Chancellor Rachel Reeves says borrowers should be allowed to switch to interest-only payments for a temporary period to ease the crisis.”
Where to fucking begin? The banks raise interest (i.e. the operating surplus over cost) and Labour says borrowers should be allowed to delay paying the principal (which they will still have to pay), but continue to give the banks profit in the meantime, and the government should co-ordinate this.
Honestly, this is the Monty Python parrot sketch: the housing market isn’t dead, it’s just pining for the fjords…
Without trying to claim that there is a way out of the crazy economics of capitalism, the fact that the “Policy and Economics Advisors” in the big political parties actually think they can solve these issues shows just how lamentable academic education actually is.
These feckers have higher degrees and more, but they don’t know their arses from the elbows.
For example, to get a 1st class honours degree you need to get an average of 70%. This means you might have got as much as 30% wrong or missing. You wouldn’t trust an airline pilot that got 30% wrong and if you do a vocational qualification to be a plumber or a sparky, etc. you need to get 100%.
It actually shows who are really the important people in our society, as if we didn’t already know.
Deposits by savers are not the only source of funds for banks to lend. They can also have recourse to the money market. They call this “wholesale” borrowing as opposed to “retail” borrowing from savers.
This is referred to in today’s Times:
“The extent to which banks profit from the spread between savings and mortgage rates depends on how they fund their loans. Banks that have more savings on their books than mortgages and therefore use the deposits to fund their home loans will profit more from a wider spread . However, banks with more mortgages than savings will use money markets to price their loans.”
A banker is quoted as saying that “margins on money market loans were generally about 0.5 per cent plus another 0.5 percent for risk.”
That would explain why banks and building societies would prefer to finance mortgages from deposits by savers rather than by borrowing from other financial institutions via the money market.
In any event, even if not all mortgages are made from deposits they still have to be funded from some source, not from thin air.
The other point to bear in mind of course is that banks (unlike building societies) make loans for other purposes than buying a house.
If Banks can create money from thin air at a stroke of a pen, then presumably Credit Unions would be able to do exactly the same. If that was possible, we could all become credit union members could then create our own money and everyone could stop working, which demonstrates what a lot of baloney this moonshine economics is.
https://www.investopedia.com/terms/a/aib.asp
This was the old intelectual training center for bankers and bank officers which provided courses in all aspect of Metropolitan Banking, International Banking, and Operational Banking, and then Pace University combined the whole program with Finance. If banks are able to produce money from thin air why they have to bother in providing this type of training ?
They also created the workstation concept which required more knowledge of the whole banking operation and every task produced a fee income, and all of them were bank officers, and bank competed each other to provide the best services to their customers. The other conspiracy theory is that the US Federal Reserve Bank is owned by individuals and by Jews
https://www.adl.org/resources/backgrounder/jewish-control-federal-reserve-classic-antisemitic-myth
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