This is bank reporting week - when it is widely predicted the banks will report profts ranging from recovering to healthy, with massive bonueses to match.
The starkest evidence that the 2008 crisis has been wasted - that the the essential reform needed to reform the world economy by eliminating the cancerous culture of big finance - will be there for all to view.
People will rightly ask the question "how do banks get away with it?"
But they might better ask "How do the banks get this cash that they then abuse?"
The answer to the second question leads to the answer to the first question. And the answer is easy to provide. You provide the banks with their profit. They effectively tax you, your assets and your future to hoover up the cash they then use to pay bonuses, and to declare as profits sums disproportionate to any risk they take and any contribution they make to society, well being or the economy.
We know banks have not passed on to consumers the almost zero cost of credit they now enjoy as a result of low offical interest rates.
We know banks contine to charge excessively for a great many of the services they supply.
We know banks get a hidden subsidy when doing so becasue as consumers we compare VAT inclusive prices - but the price banks charge for their services don't include VAT which they don't charge. And I am quite sure that the banks exploit that. They charge the price they would if VAT was included and pocket the difference themselves. And there's nothing but a change in VAT law or a Robin Hood Tax to stop them doing so, so they're exploiting you again.
But worse, much worse, is the fact that they help strip your future of hope. Banks are part of the whole pension industry infrastructure - often trading on those fund's behalf even when the banks do not own the pension company in which you save. And pension funds provide the most enormous pool of assets for which the supposed trustees are almost wholly unaccountable. After all, when did you last receive accounts from your pension fund rather than a simple note that they'd simply lost what you'd contributed to them in the last year (something that is almost inevitable as UK pension funds still insist on investing almost 70% of their assets in equities - that is shares - even though the average rate on shares over the last decade is 0% and very few fund managers do as well as the average rate of return - a fact that is when you think about it inevitable when management costs are taken into account.) One reason for that appalling rate of return is the churn and the charging that results from it - all of which in turn helps boost bank profits, at your expense and at cost to your future well being.
So who pays for bank profits? You do. Or as an economist would put it, the incidence of this excessive profit is on you, the ordinary person in the UK. Those same economists love talking incidence when it comes to taxes on banks - they ignore it when it comes to charges. But of course the charges are the more important issue. And banks aren't clever enough to make profits out of nothing (except when creating money for nothing). They have to make it from somebody - and that somebody is you.
So let's go bank to that first question, which was "how do they get away with it?" Well, because we've let them do so. And it looks like this government will continue to let them do so. And we do that in very large part becasue they've made sure we don't have the information to see by just how much they're exploiting us - and our future well being.
But it's really not hard to see the link. The flip side of the pension crisis is current excessive profits in financial services.
Or to flip it again- current excessive profits in banking are destroying our futures.
How much clearer can I be?
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“We know banks have not passed on to consumers the almost zero cost of credit they now enjoy as a result of low offical interest rates.”
The rate they should sensibly charge is dependent on the borrower’s risk profile – not the cost of their credit – and at the moment most people’s credit profile is poorer than it has been in the past.
“We know banks contine to charge excessively for a great many of the services they supply.”
Such as completely free day-to-day banking?
“We know banks get a hidden subsidy when doing so becasue as consumers we compare VAT inclusive prices – but the price banks charge for their services don’t include VAT which they don’t charge.”
This is an incredible point even by your standards. There is no comparison made by consumers based on VAT – all banks are exempt from VAT – they don’t charge VAT.
@Neil McKie
Re the last – and ignoring the obvious triteness in your other responses – for once it’s an issue where I am an in agreement with the Institute for Fiscal Studies – who make exactly the same point that this is an obvious subsidy to the banks in need of correction
People don’t compare bank to bank – if you believe in revealed preference – and you imply you do – however illogical it may be to do so – then the package consumed is decided upon as a whole so of course comparison between products occurs
Well said. The real question is what to do about it, given the depressing fact that none of the mainstream political parties seem to have any problem with it.
Interesting title ‘Project Merlin’
As I remember it Merlin summoned forth a monster (finance) to restore a rightful order (feudalism/neo liberalism) which then foundered on a grail quest (the big society) and human frailty (elite criminality) and left the land in darkness.
@Paul
Lovely analogy 😀
We are indeed paying for the huge bank profits that are now being reported by the banks, as we are the customers. Who else is going to pay? And it is not only the poor that pay through extortionate interest rates but also the well off, as the interest banks pay on deposits is virtually nothing, apparently due to historically low base rates. If that is the case, why is this benefit of low interest rates not also being passed on to all consumers. Why am I paying over 30% interest p/a on some of my credit card balances and why am I being charged almost 20% p/a from a leading British bank for a personal loan. Such interest rates were much lower before the credit crunch and the low base rates. The reasons banks give for this, is that they cannot operated below a certain level of charges as they need to cover their costs and of course the credit crunch. But who is responsible for the credit crunch? The banks made the stupid mistakes, motivated by pure greed, that created the credit crunch and the very crisis that pushed our economy into deep recession. We then had to bail them out with our tax money and money that our government had to borrow. This is surely part of the reason for the tax hikes and cuts in spending that our new government is now implementing in order to reduce their budget deficit.
What all this boils down to as far as I can see, is that we gave the banks our money which they then unwisely placed into high risk investments/instruments which turned soure and lost billions of pounds. We then gave them more money to save them from going bankrupt and our reward for all this, is that for the last three years they have been overcharging us, in order to cover all those bad debts. In other words we have paid for their mistakes and we are now paying to make them rich. Does any one believe that once they have covered all their bad debts, they will bring their charges down? What is worse, is the fact that our new government seems to be totally ignoring what is happening and doing nothing to protect us.
Regarding the part about banks and pension schemes: If a scheme has trustees who can take decision to hold 70% of assets in equities, then in all likelihood it would be a defined benefit arrangement. In that scenario how exactly have you lost your year’s contributions – the scheme is still obliged to pay you your additional years pension entitlement at retirememt regardless of actual investment returns. If it’s a defined contribution arrangement, then the member typically chooses the funds in which they invest, which determines the risk and potentially the cost (where tracker funds are available).
Banks have plenty to answer for, I’m not sure limited income in retirement should be included. I’m sure there’s an indirect argument about them making us less able to save, but the fact remains a lot of people spend more time worrying about how they can afford the latest must-have sofa than how they will afford to eat in retirement.
@Andrew
Nonsense – if they’re capturing our future income for current benefit of course they are to blame
Not least because they know exactly what they are doing
I understand the argumemt, I’m just not clear on how specifically they are capturing this income in respect of pensions. If I have a personal pension invested in index tracking funds charged at a fraction of a percent per year, what exactly are they getting off me?
@Andrew
Equities have over a decade or more made nothing
You’re paying something
Why do you do that when the advice should have been ‘Sell’, but wasn’t?
It strikes me that your confusing the issue of banks as product providers (i.e of the actual pension fund) and banks as advisers on pension funds (their own or someone else’s). In the scenario as provider, in what other industry would you expect a manufacturer to advise against buying its product when it knows a superior alternative is available? Where they are the adviser – fair comment – though that is charge that could be made against anyone who has provided questionable advice in respect of investments, not just banks, although they may be amongst the worst offenders.
Personally I find your argument would run much better applied to mortgage lending and the housing market. When they lend more (recklessly), this ultimately increases demand and therefore the cost to the next individual for the same asset increases. They have the ability to manipulate the market more directly than with equities and (in the short term) make excessive profits at the individuals direct expense.