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Friday, December 05, 2008

Banks Refuse To Pass on Rate Cut

Unsurprisingly many banks have refused to pass on yesterday's interest rate cut of 1%. The Times reports:

"Hundreds of thousands of borrowers will be denied the full benefit of yesterday’s cut in interest rates because many banks are refusing to pass on the whole one-point cut to all mortgage customers.

Britain's biggest mortgage bank, which received billions of pounds in taxpayers' money, failed to respond in full to the latest move by the Bank of England. Halifax cut its standard variable rate (SVR) by only 0.25 percentage points, while Nationwide will trim its rate by 0.69 points.

A borrower with a £150,000 loan paying Halifax’s SVR will see payments drop by only £25 a month.

Only Lloyds TSB, HSBC and Woolwich said that they would cut their SVR by one percentage point. However, HSBC and Woolwich failed to pass on last month’s 1.5 percentage point cut

It seems that the banks have not yet learned that the rules of the game have changed. In the "good old" days they could more or less do as they pleased to their debtors/customers, safe in the knowledge that very few people "that mattered" would kick up a fuss.

However, two fundamental changes have occurred:

1 The banks, as a result of their greed, stupidity and ignorance, have jeopardised the financial system of the the Western world by unleashing a lending frenzy and by gambling trillions on complex financial instruments that they didn't understand. In the event that these deals unravel completely, as they may well do, the losses incurred will exceed the annual GDP of many middle to high ranking economies.

2 The UK government now owns shares in some of the major banks. It has been reluctant, thus far, to call the shots; but as time goes on it will become increasingly interventionist.

Like it or not, no matter how hard the banks may squeal that they are barely able to make a living in the current economic environment and that they must take account of the higher risks, the issue is not simply a matter of capital base and margin differentials between base rates and LIBOR.

The higher risks that the banks complain of are due to the fact that they all but ignored risk in the past, and went on a lending and gambling binge. All very well, but it is not right that the debtors/customers are made to pay for the greed and short termism of the banks.

The issue now is one of politics, culpability and people's livelihoods/homes. The fact that the banks have yet to grasp that point indicates that they are still in denial.

My advice to the banks is wake up now, the rules of the game have changed, or you will soon be on the receiving end of a very nasty wake up call.

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