Cooking the Books 1 – The papers learn how banks work
Over the weekend of 17/18 June two national newspapers ran the same story. ‘Banks rake in £4.8bn extra profits in “appalling rip-off”’, said the i paper. ‘Britain’s biggest lenders rake in £44BILLION as interest rates rise while hard-hit families suffer from rising mortgage costs’ said the Mail on Sunday. They were criticising the banks for being quick – when the Bank Rate goes up – to put up the rate of interest they charge those with a mortgage but much slower to put up the rate they pay to those who have savings with them.
Both pointed out that this leads to an increased ‘net interest income’ for banks which the i paper said was ‘the profit made by banks from charging higher borrowing costs on mortgages and loans, compared to what they pay out in savings accounts.’ The Mail on Sunday defined it as ‘the difference between what the companies charge borrowers for loans and mortgages and what is paid to savers in interest’. Theirs was the more accurate description as it’s the banks’ income. Only a part of this will be their profits as out of it the banks have to pay their costs such as buildings, computer systems and wages. Banks also have other sources of income which are not banking, for example fees from financial advice and management.
‘Net interest income’ is the key to understanding how banks work as it shows that they are financial intermediaries making money by borrowing at one rate of interest and lending at a higher rate. Others have suggested a different model, arguing that banks simply create the money they lend by a few keyboard strokes. In that case banks would not be financial intermediaries but money creators. Their income would be ‘gross interest income’ and their profits greater by the amount they currently pay savers (and others who lend them money). Populist journalists could be even shriller in denouncing them as greedy.
But the papers confined themselves to examining the ‘net interest income’ that shows that banks are financial intermediaries rather than money creators. The money they lend — the credit they extend — comes from money they themselves borrow. They compete against each other to attract savings in order to get money to lend. Which they wouldn’t need to if they could simply create it.
Banks don’t borrow just from savers. They also borrow from the money market, where the lenders are other financial institutions and banks, and, unlike building societies (which are essentially specialised banks), they don’t just lend money to buy houses.
The high street banks are not the only financial intermediaries. There are other financial institutions which borrow money to re-lend; in fact, there is a whole ‘shadow banking’ sector involved in this, less regulated and more risky and dodgy. At the other end are credit unions which nobody dares claim create the money they lend.
There is nothing special about banking. It is just one field of profit-seeking capitalist business enterprise. As their trade association, UK Finance, told the Mail on Sunday:
‘Banks are commercial organisations and therefore seek to offer the best possible value to customers while also making a profit. This allows them to invest in their business and deliver shareholders a return on their investment.’
Bankers don’t control the economy. Banks don’t make bigger profits than other capitalist enterprises and don’t need to be singled out as ‘finance capital’ as something worse than industrial capital. There is one difference, though. While the physical assets of industrial capital will be taken over in socialism and used to produce directly to satisfy people’s needs rather than for profit, banks will have no place.