As The Guardian has noted:
Millions of people are being short-changed on savings rates, with banks and building societies failing to pass on this month's 0.5 percentage point interest rate rise, research has claimed.
They added:
On 4 August, the Bank of England pushed up interest rates by 0.5 percentage points to 1.75% as the UK battles to prevent inflation running out of control. It was the sixth successive interest rate hike.
And then they note:
Research issued on Tuesday found that as of 15 August, Britain's banks and building societies had passed on the full 0.5 percentage point increase to just two out of 233 easy access savings accounts.
Why is this? They say:
Some experts have previously argued that most of the big banks are uninterested in attracting savers' deposits.
Some will say the banks are relying on customer apathy. Some customers will quit in search of a better deal, if they can find one, but many others will not notice the change or will not get around to moving their money.
That though does not get near the real reason, which is the explanation provided by modern monetary theory. Since banks do not need to hold deposits from customers to make loans, because all loans are made as a result of new money creation, of course banks are not willing to pay people to deposit funds with them anyone. Why on earth would you want to pay for something you no longer need?
Banks have implicitly or explicitly (it does not really matter which, although some honesty on their part would help, however unlikely it is) rumbled the truth in MMT, which is that bank deposits are economically useless, however much people desire to hold them.
It will be a task for an enlightened government to provide a new use for savings. My suggestion is here.
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The only time to take saving and banking seriously is when we charge interest in relation to how socially useful to what end the money is being used is. As economist Richard Douthwaite once suggested.
The present system is a con.
If the commercial banks don’t want savers’ money why do they offer any interest at all? Why do they even bother to offer savings accounts?
History
And regulatory requirement
LCR (Liquidity coverage) and NSFR (Net stable funding) ratios (along with capital requirements) mean that banks can’t create loans/deposits without regard to the nature of the loan (risk weighting) or the nature of the deposit financing the loan.
However, rising rates clearly permit margin expansion in practice.
PSR’s idea is a good one as regulators only target bank safety and that favours collateral and therefore property lending.
That is not quite right. The smaller banks without current accounts rely on savings inflows as their own lending goes straight into the current accounts of the larger banks. So I accept your wider point but that is why the Best Buy tables do not feature larger banks with current account facilities.
They are not banks then, for all practical purposes
I know about this. The ability of a bank to create new loans and thus money depends on how likely that new money is to leave the bank. So if I am Barclays and give you a £100k mortgage then you will pay that to the seller, but it is quite likely the seller also banks at Barclays. If I am Metrobank it is very unlikely. So this means there are huge economies of scale. The bigger your bank is the more bank money you can create. If you are the only commercial bank you can create infinite money, same as the central bank. So deposits are created by lending, but they are not unimportant. The balance sheet has to balance at the end of the day.
But CBRAs used for inter bank settlement, not deposits
While I agree with you that, per MMT, banks do not need to amass deposits before making loans, I can nonetheless recall that forty or fifty years ago, the Business section of the Sunday New York Times used to be full of ads from savings and loan associations, mostly in California, soliciting time deposits at interest rates always higher than those being offered by New York S&Ls. And, of course, people remember when banks competed for deposits by offering “free gifts” like toasters.
Granted, I don’t see much of this competition for deposits these days — but how do we square past competition on interest rates for deposits with what MMT has to say? (Note: many of the people in my MMT classes are old enough to remember this competition for deposits.)
The world has changed
We now know how fiat currencies work
We now get MMT
So why suggest outdated thinking says I am wrong?
I’d give this a slightly different slant to account for the observation that banks do compete to attract depositors – at least to some extent.
Banks lend first and look for reserves later. Banks do need reserves, essentially Government issued money, to settle interbank clearing imbalances and to settle payments of their customers to Govt.
Attracting new depositors is one way to secure them. The banks don’t need our money but it is a relatively cheap way to accumulate reserves.
I’d go further. Banks don’t need the deposits, they can just create money by lending. But they need the borrowers.
The deposits are a form of supermarket bait selling. You go in for a pint of milk and come out with a loaf of bread, a tin of peas, and the Woman’s Weekly. Banks know that the easiest source of customers to lend to is their depositors. People need somewhere to put their money between payday and spending, when they then need to borrow some money their first choice through inertia is going to be the bank where they’ve put their wages.
@ I Littleton,
The ‘inertia’ argument is a good one and another valid reason for banks to offer deposit accounts.
We should be aware, though, that the money deposit accounts bring in is not the same as the money the bank can create for itself. This is much more likely to be Government created or created by some other bank. If the latter the bank can demand that it be exchanged for Govt created money.
Of course other banks will make the same on it so, in practice, it is only the difference which is settled by Govt money.
True