A sticky situation for UK banks
Interest rates have gone up considerably over the past 12 months, especially in the UK. And the headlines are shouting about the impact on borrowers, particularly mortgage holders. Yet, on the other side of the balance sheet, savers don’t seem to be getting a commensurate uplift on their savings rates.
Banks have been “fighting” with regulators about passing on higher interest rates to savers, and it’s hit the headlines here in the UK.
I thought it might be interesting to explore the underlying dynamics of the discourse from the perspective of policymakers, banks, and consumers.
Rates get political
On the one hand, you can see why the government would want to pick this fight.
With mortgage rates pushing 6% (for a 2-year fix), lots of people are picking on banks for not increasing deposit rates in line. Apparently the Bank of England and the Chancellor have both been on the case, trying to push the big banks to do more to increase savings rates.
There is also the secondary motivation of trying to use this lever to help with the inflation fight. If prices are rising 10% yoy, I’m incentivised to make as many of my purchases now rather than later – behavior that in the aggregate ends up fuelling inflation even further. But if I know that putting my cash on deposit will give me a savings rate that mitigates inflation, my consumption will not accelerate, and might even decelerate, helping actually cool inflation.
Playing with fire
This is all well and good, but as this FT article points out, it’s dangerous to meddle with the banking system.
If we want a resilient banking system, we need banks to “make hay when the sun shines” and compel them to save some of those excess profits as capital, to help protect balance sheets from a rainy day (and prevent another taxpayer-funded bailout).
Allowing profitability to creep up also attracts private investors into the equity capital, which again is helpful to avoid taxpayer funds getting tied up again (as they did with RBS/Natwest).
The dangers of overreacting
Of course the authorities care about whether the system is serving consumers well, so they should be investigating if there is evidence of “profiteering.” But they should care more about the behavior of banks, sniffing out any indication of collusion or anti-competitive behavior…of which there is basically no evidence so far.
But overreacting to an increase in banking profitability is probably unproductive. Better to assess if the market is working well. MoneySuperMarket is showing rates from 4.4% for easy access all the way up to 6+% for 2 year fixed deposits (offered by Leeds Building Society and Investec respectively, for a £10k deposit). Barclays meanwhile is offering 1% on easy access and 4.3% on a 1y fixed rate deposit, while HSBC is at 1.74% for easy access and 5.1% for a 2y fixed deposit.
A sticky situation
Clearly there is a wide discrepancy in rates available, and if someone was really motivated they could shop around and get some decent rates (“decent” relative to the base rate). But, unfortunately for the BoE and the Chancellor, deposit customers tend to be sticky.
We were recently speaking to some FIG borrowers on the continent, and the feedback was the same. Deposit rates are rising, but not that fast, so for a lot of FIG issuers, deposits are now a cheaper source of funding than issuing bonds in the wholesale markets. And the stickiness of customer behaviour means that this won’t be changing that fast any time soon.
A lot of that stickiness has to do with the incredibly lengthy onboarding process for getting a new bank account set up. KYC + AML are important, but they work in direct opposition to fostering a liquid savings market.
Choice is key
Compare that to the ease with which one can switch their energy supplier, and you can see which energy tariffs are much more competitive than bank savings rates. The BoE and the Chancellor should spend their time trying to make client onboarding (and thus account switching) easier, rather than sending letters to the CEOs cajoling them to increase their rates.
Introducing alternative savings products will also help. We have Origin issuers paying 6.9% for 1y in GBP (investment grade). Right now, these bonds are only issued to the wholesale market because of a whole host of post-GFC regulation that had the intention of protecting investors, but had the ultimate outcome of just locking them out of the bond market.
If people had access to a broader suite of savings products, and signing up and accessing those products was easy, then you’d definitely see the largest banks raising savings rates to stay competitive. This is what the BoE/Chancelor should focus on.