Generally known for his good-natured disposition, Jeremy Hunt takes no prisoners when it comes to how banks treat depositors.
The Chancellor has turned his anger on lenders who are boosting profits at a time when rising rates are hitting British households. He said last week that it takes «too much time» for depositors with instant access bank accounts to earn higher returns.He told the House of Commons: «I'm working on a solution. This is an issue that needs to be addressed.»
The comments came after Hunt convened the bosses of Britain's biggest creditors for a Downing Street summit, during which he told those present «in no uncertain terms» that he wanted to see action on troubleshooting.
Now, with the government threatening regulatory crackdown if the banks don't pay up, bosses are forced to walk a tightrope between replenishing their coffers after years of ultra-low rates and dodging charges of speculation as borrowers struggle to pay off their debts. .
3006 The Big Four banks cannot refuse to raise interest rates.
Having spent the past decade and a half repenting of past misdeeds, the industry is now facing one of its biggest reputational problems since the 2008 financial crisis.
The problem is related to the so-called net interest margin of banks — the difference between what lenders charge borrowers and those who invest money.
After the Bank of England raised the base rate to 5%, banks quickly increased the interest they charge on mortgage products but have been criticized for being much slower in raising the rates they offer to savers.
According to Moneyfacts, the average interest rate on a two-year fixed-rate mortgage jumped to 6.26%, while the average easy-access savings account pays only 2.36%.
3006 Savings rates rise little for borrowers
In their Q1 2023 results, UK listed lenders revealed a growing gap between the interest they charge borrowers and the lower interest rate they offer savers.
Barclays net interest income jumped a fifth part to £1.6bn. during the first three months of the year compared to the same period in 2022 after net interest margin rose to 3.18%.
Meanwhile, Lloyds reported a similar 20% jump in net interest income to £3.5bn after net interest margin rose from 2.7% to 3.2% year-over-year.
Banking experts expect it. to increase even more when lenders release their half-year results in the coming weeks.
John Cronin, banking analyst at Goodbody, says: “I don't think we're necessarily at the peak of net interest income. “However, he adds that the industry is approaching a point where higher official rates are hurting tenders in terms of returns.
“On the other hand, higher rates are still good in terms of net interest growth, but on the other hand, higher rates act as a barrier to potential borrowers and in terms of loan supply, so you will see lower credit growth. for banks.
“I would say that we are at the peak of profitability, and not at the peak of net interest income. We are certainly at a tipping point now.”
But politicians will be keeping a close eye on the banks' latest results.
Banking fortunes on track for future growth
Harriett Baldwin, Conservative MP and Chairman of the Treasury Committee, says: “The committee has really focused on this issue since the start of the year, when we first noticed that banks weren’t taking rate hikes as strongly for contributors. like they were for mortgage holders, and it's getting worse and worse.
“We have been following their first quarter results and we will be following their second quarter results. It is clear that they are currently increasing their net interest margin.”
However, after years of struggling to repay a loan in an ultra-low interest rate environment, some feel that banks are not acting irresponsibly.
Gary Greenwood, an analyst at Shore Capital, says: “I don't think [net interest margin] is excessive at the moment. They are where they need to be if banks are to deliver economic returns to their investors.”
Despite this, politicians and regulators are now keeping an eye on lenders and putting significant pressure on them to tighten their net interest margins. without the need for more overt intervention.
Goodbody's Cronin believes Hunt's demands are likely to make a difference amid fears that failing to pass on interest rate hikes to savers could lead to a tougher approach from ministers.
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He says: “Political pressure has a significant impact… The reality here is that banks have always had to be very careful in terms of how they navigate politics. The government has a lot of leverage available.
“If the banks are not seen to be playing ball, all sorts of implicit plausible threats can arise, such as windfall taxes and [further] regulation. These are all possibilities, and they will be taken into account when making decisions.”
2306 B.C. interest rate
Baldwin also raises the possibility of a windfall tax if Labor wins power in the next election, adding: “At a time when average household budgets are taking such a hit from higher rates, if banks are to be seen as the money-makers. from higher rates, I don't think they should be surprised if politicians start looking for a solution to this problem.»
UK Finance, which represents the banking industry, argues that savings and mortgage rates are not directly related, so move around at different times and for different amounts.
Others defend the sector more vigorously. Shore Capital's Greenwood says: “Regulators need to be very careful. After all, they are independent businesses that need to generate economic profits to justify their existence. If the regulator and the government consider these revenues to be excessive, perhaps they should consider nationalizing the industry.”
The chief executive of one of the London-based lenders also notes that mortgage margins are declining as interest rates rise, adding: “Banks don't pass the full cost of rate increases on savers, but they don't pass the full cost of rate hikes on savers. mortgage clients too. Banks are criticized for the rates offered to depositors, but no one talks about this other point.”
More problems with mortgages
The Financial Conduct Authority (FCA) launched a review last week to make sure depositors are benefiting from higher rates.
He previously mentioned the new «consumer duty», which comes into effect later this month, as a mechanism to ensure that banks act «in good faith with their cash savings accounts» and ensure that they provide «good results» for clients.
The city watchdog could also revisit consultations, which it put off during the pandemic, on a «single easy access rate» to apply to all easy access bank accounts to allay concerns about a potential «loyalty penalty» in the market. .
Baldwin says the Treasury Committee would welcome a revival of the FCA policy, adding: for their inability to shop around because there are no bank branches nearby, that they pay the price.»
The mood music in Westminster has changed in recent months as lenders have become easy and obvious targets in the mortgage crisis that is hurting the country.
It remains to be seen, however, whether harsh words will have any effect Hunt's influence and whether the Conservative government will follow through on its threat of tougher regulatory intervention.
Greenwood isn't convinced. «Apart from a significant increase in bad debts, I don't see a drop in [banks'] profits,» he says.
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