Rachel Reeves could cut the interest paid by the government to the UK's commercial banks by up to £20bn a year. So why won't she, when she says she is so short of money that those with disabilities must suffer?
This is the audio version:
This is the transcript:
Why won't Rachel Reeves save at least £20 billion a year when the opportunity to do so is available to her?
I wish I knew the answer to that question because, as we know, she has chosen to penalise pensioners with the removal of the Winter Fuel Allowance to save a few bob here and there.
She is now penalising those who are on disability benefits to the tune of £6 billion a year to supposedly save the government money and balance its books.
And she doesn't need to do so because she could save £20 billion or more a year as a consequence of reducing the cost of the interest payments that the government makes in the UK, year in, year out.
How could she do that?
She could simply stop paying interest on all the bank deposits that the commercial banks in the UK supposedly hold with the Bank of England.
And I used the word ‘supposedly' in that last sentence very deliberately because the deposits in question were not made out of funds that the banks in question had generated for themselves, or out of the funds that other people had deposited with them, but they were instead created by the UK government as a consequence of money creation during the period from 2008 to 2015 as a result of the global financial crisis, and in the years 2020 and 2021 as a consequence of the covid crisis.
During those two periods, more than £800 billion of money was created and injected into the UK economy by the UK government via the Bank of England, who was responsible for the money creation in question. And because double entry requires that there be both a debit and a credit with regard to every single bank transaction, the process of money creation required that there be a deposit in the Bank of England to match the money that was injected by it into the global economy through the commercial banks. The sums in question were called deposits by the banks, even though they had been created by the Bank of England, and absurdly, although the banks had literally nothing to do with the creation of those deposits, they are paid interest on them.
It's like you discovering that your bank has decided to put £10 million into your bank account and then pay interest on it, even though you've done nothing to deserve that or earn it. It is quite literally that crazy.
And yet Rachel Reeves continues to pretend that these are genuine deposits by the commercial banks that they somehow created, and which she, therefore, has to pay interest on via the Bank of England.
That is not what happens in Europe. The European Central Bank does not pay interest on all such deposit accounts maintained by European commercial banks with the European Central Bank.
And likewise in Japan, the equivalent balances held by commercial banks with the Bank of Japan do not by any means all earn interest. The vast majority of the balances there, in fact, earn no interest at all.
So, Rachel Reeves could do the same thing here. She could simply cut the interest paid on some or all of the, near enough, £700 billion of balances remaining on these accounts, but which she seems entirely reluctant to do.
How much could she save as a result? Well, the current interest rate on that £700 billion is at 4.5%, so the interest is running at over £30 billion a year.
Now, I'm not saying she should cut all the interest. I can see some reasons why the Bank of England needs a mechanism to pay some interest so that its decisions on bank base rate have an impact upon the economy. That's an acceptable thing for it to do, but it could, for example, cut interest payments on £500 billion and that would save over £20 billion a year.
The cost would be entirely born by those commercial banks who have been favoured with that £20 billion a year of excess money payment year in, year out, for years gone by and have profited as a result, with the benefit going through the dividends that they pay to the wealthiest in the UK economy.
So, we have a direct choice. We can continue to benefit the wealthy by making these payments, or we can cut them.
We can benefit those with disabilities, those on low pay, and pensioners who need to be supported during the course of the winter because of the excessive costs of energy which are being imposed upon them, and so much more.
Which would you prefer? Would you rather that we continue to give handouts to the biggest banks in the UK, who never earned this money?
Or would you rather we support those who really need money to make sure that they can actually survive in a pretty brutal economy?
I know where I stand. Where do you stand?
If you think that these interest payments are wholly unnecessary and should be stopped, why don't you tell Rachel Reeves or, better still, tell your MP? Just write to them and say,
Dear, whoever it might be.
I am aware The Bank of England pays interest at cost to the UK government more than £20 billion a year on the Central Bank Reserve Accounts maintained by our commercial banks with it, and that this is unnecessary because such payments are not paid by the European Central Bank in a similar situation, or by the Bank of Japan. Why then do you want these payments to continue when the money could instead be used to support those who have disabilities or those who are living in poverty?
Yours sincerely,
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“Rachel Reeves continues to pretend that these are genuine deposits by the commercial banks ”
Reasons: does not understand, does not want to understand, too stupid to understand, paid (in the future) not to understand.
Any one of them renders her unfit to hold any sort of elected office whatsoever.
This failure also reflects badly on the MSM – banksters before country – or some such headline – but journos are likewise to dumb or lazy to bother.
To make writing to your MP very easy, try “They work or you”, which also sends you alerts (if you want them) about their votes and speeches.
https://www.theyworkforyou.com/
Also does Scottish, NI, & Welsh paliaments.
May I siggest that, when writing to your own MP you include your address, as MPs will not communicate with people who are not their constituents.
Correct
Postcode is sufficient.
Letter sent.
However it does state that letters that are copy and pasted will not be read. So I paraphrased the above example into my own words.
My MP is Kate Osborne. I hope she will be sympathetic.
Good idea
Thanks
The banks will simply cut the rate they pay savers to compensate, so to say that the cost would be entirely born by the commercial banks is simply not true.
Just as the increase in employer’s NIC partly fell on employees, your proposal would result in lower interest rates for savers.
Oh dear, the best off might get less.
By definition, anyone getting significant interest on their savings is already comfortably off with surplus cash over and above their needs and even wants. They get a whopping great tax-free allowance on the first £1,000.
I think they are getting enough subsidy already and don’t need further help, in effect, taken from the mouths of hungry children or the budgets of disabled PIP claimants. Do you?
I receive such interest and those subsidies. I neither need nor want it.
It is as if the state exists to subsidies the wealthy
Sent
I think you need to add the word ‘Interest’ between pays and at
Accepted. Added
Very interesting article. Do you have links to underlying information e.g. amount of interest paid, approach of ECB and Japanese Banks, or any papers discussing the position in a non-technical manner. It would be helpful to forward this to the MP so that they can quickly see the risks /benefits without having to undertake detailed research themselves.
I haven’t seen mention of this in the media- have you raised this already?
Sorry – not right now
Too much else to do
I think this mentions the ECB two tier reserve payments:
https://www.ecb.europa.eu/mopo/implement/mr/two-tier/html/index.en.html
and this at the BoJ
https://www.boj.or.jp/en/research/brp/ron_2022/data/ron220527a.pdf
and the Bank of International Settlements on the BoJ tiered rates
https://www.bis.org/mc/currency_areas/jp.htm
Many thanks John
Appreciated
Sometime soon I hope to get the time benefits of not working – but I am still finishing Sheffield loose ends. You might call me a mug.
I will have a crack at this, thanks for the text. My new Labour however hardly answer letters whereas the previous Tory was always defending themselves.
What the interest payments reify is that the rich have cornered the money making potential of the British government for their own purposes. It is typical rentierism, making money out of money, rather than doing anything useful with money.
This is why I do not believe we exist in a democracy. This is un-democracy, and is illegitimate in my view.
And it is not even proper capitalism either for that matter.
Sent. First time I have contacted my new MP. Nice feeling to start the day, thank you.
Thanks!
You can also go directly to https;//www.writetothem.com enter your postcode and it will find your elected representatives
Morning Richard
I need some help with this sentence..
“I can see some reasons why the Bank of England needs a mechanism to pay some interest so that its decisions on bank base rate have an impact upon the economy”
Can you enlighten me a bit more on this I don’t get it.
Thanks
The Bank of England wants markets to follow the rates it sets
That means it must pay enough interest at that rate for the mraket to take notice
Have you considered starting a petition on petition.parliament.uk? I say “you” as I think it’d be much beter coming from someone who understands and has a little more gravitas on this issue than I.
My last was rejected
If anyone else wants to discuss wording please mail me
Richard
Re starting a petition. I copied the letter you wrote and sent to my MP. I am curious why the parliamentary website rejected you starting one upon this matter. Do you know? If you can’t through that avenue – although, obviously the best way. What about trying https://www.change.org/ and start one through them?
Thanks for all the work you do. I so appreciate it. I hope you got a nice walk in the countryside in today 🙂
I was not rejected on this one – sorry to give that impression.
And it was Welney today, with cranes being seen.
Worth a try – but the govt has a ban on openly considering or discussing any ideas or proposals.
If your MP raises it they will be branded as a troublemaker – no member of the cabinet is allowed to think out loud for themselves .
An ironic contrast with the Trump cabinet who can call each other dumb as a pile of bricks – and Trumps sidekick just laughs it off as ‘boys will be boys’.
.
Done with some editing. I have established a fairly good relationship with my Labour MP who beat the sitting Tory by a slim margin, and whose maiden speech was in support of the mainenance of the WFA, albeit voting for the government.
Thanks
perhaps we need to go back to a variation the BCE – Before Common Era theology and economics and decide that interest is a necessary evil but you should limit its application
The simple answer is:
She doesn’t give a flying one for people but is making sure a nice wee job in the city awaits her.
As you note, there are some technical issues that make this a bit more than “stop paying them interest”… but it is doable.
If you just pay no interest then banks will just buy gilts instead; these bear interest and can be “turned into cash” if required by rep or sale in an instant. This would drive gilt yields (at least at the short end of the curve) much lower – much lower than the Base Rate (deemed the “right” rate for the economy). (The fact this Base Rate is currently too high is another story – but here we assume the BoE is doing a sensible job).
So, you have to compel banks to hold additional reserves and getting the rules right and amounts required for each institution set correctly if quite a tricky exercise – indeed, there is no obvious formula. But just because you don’t now the precise details of the end destination does not mean you should not start the journey. There are £700bn in Reserve Accounts. Institute minimum balances of, in aggregate £100bn now – that is saving £4.5bn a year…. this could be increased slowly until it starts to reach cause problems in the plumbing system….. which might be at about £500bn – but nobody knows or can know until we get there.
Labour has been asking for submissions on policy from its members over the last few weeks. I submitted this one with a remark saying that it was an area of my expertise and that I would be willing to spend some time explaining this to them if they wished to explore it further. Did I hear anything? Of course not.
But remember, this a base money Clive. It must be in a CBRA.
How do they buy gilts?
As far as I understand it banks can buy gilts using CBRA balances. But if they do, the govt would simply be paying them interest on the gilts that they would have been paying anyway to someone else because the bank would have to buy them by transferring CBRA balances to the seller. They could, of course, only buy them from institutions such as pension funds or Market Makers that have CBR Accounts. It still means that the Treasury would be paying less interest in total, so your prescription, Richard, works.
Before QE, the banks only had to add to their CBRA balances in the event that they ran short of them in order to settle transactions, normally overnight, and they would do so by depositing gilts (or other securities) at the BoE in exchange for credits to their CBRAs. In fact, that was the original function of what were then called Central Bank Exchange Settlement Accounts – until 2005.
See my comment to Clive
I can’t see how this works beyond the first or second mover.
You are right in the sense that base money, in aggregate, is only destroyed by paying taxes to the government or gilt issuance (by government). But think of the behaviour of an individual bank (Bank A) with £50bn in its CBRA. It will buy (say) £30bn of short term gilts at (say) 4% yield. Their CBRA balance will shrink to £20bn and they will own an asset paying 4%… happy days. Who do they buy from? Well, Bank B who will suddenly find their CBRA balance up buy £30bn and paying no interest (instead of 4% on the gilts it just sold to Bank A). So, they go and buy from Bank C at 3% who buys from Bank A at 2%…. until we reach an equilibrium gilt rate where Banks are indifferent to holding reserves at 0% or gilts at XX%. XX might be about 0.3% to 0.5%.
So, with no change in aggregate CBRA balances, short dated gilts would reprice to very low levels with an impact right along the curve. You must force banks to hold more Reserves if you are going to stop remunerating them.
As far as I know they cannot use their CBRA to buy gilts, per se.
Are you suggesting they do by rearranging their inter-bank balances by effectively buying from other banks on the open market, so reducing their central bank liquidity?
There is a natural limit to how far this can go. Someone has to hold the CBRAs. They banks can’t overall change them in aggregate so does your logic work?
Of course a bank can buy gilts with money in its CBRA…. I agree, it just goes to another bank and the aggregate does not change. But my point is that after this game of pass the parcel of money that does not pay interest (in favour of interest bearing gilts) we get exactly where we started except – and this is the whole point – short gated gilts will be re-priced to 0.5% and all other interest rates – long gilt yields, corporate credit etc. will be completely repriced accordingly. The Base Rate will be irrelevant.
But net they can’t buy bonds or change the the rate. So I am not sure I agree with you.
Hmm. I have to disagree with both you and Clive, but who am I to argue? I am only going by what I learned from Andy Haldane (+ one of his team), Mike Hall and Stephen Hale told when I was researching how Central Bank Exchange Settlement Accounts work. I have never had any direct experience of bond trading, but I do think that what I said was logical. And it was now some time ago – probably 2008.
CBRAs are a fixed quantum. Overall they can’t be used to buy gilts in issue then.
Nigel, we need to distinguish between issuance of new gilts and the re-pricing of existing gilts.
New issuance reduces CBRAs and the Government has just chosen to pay a gilt coupon instead of interest on the CBRA account. So, your are correct….. but the decision to issue gilts resides with the government, they are not issued on demand.
Without new issuance we end up with CBRA balances, in aggregate, unchanged. Currently, they are remunerated at the Base rate and that drives the pricing of short maturity gilts – and in turn all rates in the market.
If CBRAs attract no interest then there is a fruitless scramble (game of pass the parcel) as banks try to hold gilts instead of Reserves. Of course, all that happens is that gilts reprice to very low (0.3 to 0.5% is my guess) yields and have a corresponding impact on all market interest rates.
So, to reduce the interest rate cost on CBRAs AND keep market rates close to policy rates there must be compulsion to hold unremunerated Reserves. That is fine but deciding how much for each bank and on what criteria is tricky.
We are on common ground now
“short gated gilts will be re-priced to 0.5%”. I don’t get that, Clive. I assume you mean the yeild will be repriced at 0.5%, but I don’t really see why. Also, I don’t think the bank would not buy the gilts from another bank, more likely a pension fund with its own CBRA that is looking to increase their cash holding. Or even a new issue from a GEMM.
Pension funds do not have CBRAs
Nigel,
For an individual bank there is always a choice between buying a short dated gilt or holding a deposit at the BoE. My suggestion is that if they get nothing on their deposits at the BoE they will buy gilts instead if they offer anything better. Research at the Fed and real life behaviour during the “taper tantrum” a few years ago (where the Fed assumed a low number) suggest that 0.2% pick up drives banks from holding reserves to something better. So, 0.5% is certainly a realistic rate at which short dated gilts would trade. My example of banks A, B and C was very primitive but banks would hog all the short gilts and non-clearing bank investors would move into other instruments or out along the gilt curve.
Once the dust settled, all market rates would end up “as if” the Base rate almost zero. ie. very low short rates, very steep yield curve….. NOT what policy makers would want.
But you are still nut addressing my CBRA point here. The quantum of these can’t stage so I cannot see how this strategy is delivered except via new issues, maybe.
My understanding is that some do since the BoE widened the scope of who can apply for them. But I don’t actually know. There are all sorts of firms that have them these days. GEMMS certainly do. Irrelevant, though, because the bank would transfer the reserves to the bank at which the fund held its business account. Then that bank might have a problem with too many reserves, which is maybe what Clive means. But there are other assets they could purchase such as Corporate bonds or swish premises in Canada Square. Whatever, they’d be looking at offloading their reserves. Resulting in the reserves ending up in another bank’s CBRA. Sorry, but unlike you I do not work 24 hours day and will now turn my computer off.
But these are nit CBRA activities.
I partly concede your point, Richard, but according to ChatGPT “if a pension fund sets up or owns a bank or financial subsidiary that qualifies in its own right, that entity (not the pension fund itself) might hold a reserve account.”
Clive, I greatly respect your superior knowledge. I think I understand that you are actually a bond trader, so I suppose you should know. You should therefore know that the DMO issues new bonds on a very regular basis acccording to a calendar, and sometimes as often as 3 times a week. For example, between 1st April and 8th April, they issued gilts to the value of nearly £9 billion. So there should always be new bonds to be bought. I have pesonally never bought any gilts because it is nowadays made too difficult for the individual. My broker, A J Bell, did offer the service, but only by phone – although I believe they do have a select few listed on their online platform nowadays.
I think we should not get too far down this rabbit hole.
We agree that…
a) we should restrict interest on reserves
b) it can be done
c) there are some technical issues that need consideration…. but they are not a barrier
May I ask here, a very obvious question on the technical issue; how do the ECB and Bank of Japan do it?
Regulation
I appreciate that. I was setting a framework. Here is the detail: ECB “Two-tier system for remunerating excess reserve holdings” (https://www.ecb.europa.eu/mopo/implement/mr/two-tier/html/index.en.html#:~:text=How%20does%20it%20work?,facility%20rate%2C%20whichever%20is%20lower.)
The two-tier system:
“All credit institutions subject to minimum reserve requirements under Regulation ECB/2003/9 are eligible for the two-tier system. The minimum reserve requirements are mainly based on bank customers’ deposits. In this sense, the use of minimum reserve requirements for the calculation of the exemption allowance ensures that the two-tier system focuses on banks whose business models rely on deposit funding, which are typically the main lenders to the real economy in the euro area.
How does it work?
The two-tier system applies to average end-of-calendar-day excess reserves over the maintenance period held in reserve accounts with the Eurosystem. It does not, however, apply to excess liquidity held at the ECB’s deposit facility. The volume of reserve holdings in excess of minimum reserve requirements that is exempt from the DFR is determined as a multiple of a credit institution’s minimum reserve requirements. This is known as the “allowance”. The multiplier is the same for all credit institutions. The non-exempt excess reserve holdings continue to be remunerated at zero percent or the deposit facility rate, whichever is lower.
What is the applicable multiplier and remuneration rate of the allowance?
The Governing Council decided on 12 September 2019 to set the initial multiplier for the calculation of the allowance at six, and the initial applicable remuneration rate at 0%.
On 8 September 2022 the Governing Council decided to set the multiplier to zero with effect from the maintenance period starting on 14 September 2022.
Can the multiplier and/or the allowance remuneration rate be changed?
Both the multiplier and the allowance remuneration rate can be changed over time. The Governing Council may change both to ensure that the two-tier system fulfils its purpose.
Any adjustment to the multiplier or to the remuneration rate applies as of the following maintenance period, after such a decision has been announced.
Main technical characteristics of the two-tier system
Eligible institutions: all credit institutions subject to minimum reserve requirements (MRR) under Regulation ECB/2003/9
Allowance: a multiple of an institution’s MRR
Multiplier (m): set to zero as of 14 September 2022 – this can be changed over time
Exempt amount: amount of excess reserves up to the allowance
Remuneration rate of the allowance: 0% – this can be changed over time
Applicability: excess reserves (i.e. reserve holdings in excess of MRR) held in reserve accounts with the Eurosystem (and excluding holdings at the Eurosystem’s deposit facility)
Start date: 30 October 2019 (the start of the seventh maintenance period of 2019)
Notes:
MRR = maximum (zero; reserve base * reserve ratio – lump-sum allowance). MRR are calculated as a percentage of the institution’s reserve base minus the lump-sum allowance with a lower bound of zero. Further information on minimum reserves and reserve accounts can be found in Regulation” (ECB website)
Unfortunately this comment now appears on an effectively dead thread, and will scarcely be read by those who participated.
I admit that might be true
But I also think the nuances of this calcualtion are less important thand the substantial political point.
I’m afraid I can’t really see myself writing this to my MP in Hamilton:
Dear Imogen Walker,
Can you get your parliamentary boss Rachel Reeves and your husband Morgan McSweeney to agree to stop paying all that interest etc. . .
🙂
Hi Richard,
Only this week I was thinking about this very issue as something ideal for you to take to Radio 5Live Breakfast’s ‘In my opinion’ feature.
With very minor tweaks, your draft letter is essentially the script I was groping for. Short, punchy and easy for anyone to comprehend, the audience reaction should be disbelief followed swiftly by anger.
Why not give it a shot? The only downside is an earlier start than for Nicky Campbell’s show.
They have to ask….
I’ve been considering this for a couple of weeks but hadn’t had time to dig out all the data. Your post gave me the information I needed.
I’ve sent my MP several emails since his election in July. Not received much in reply but I like to think it might have some effect.
I used to get a better response from my last MP, but she retired and the Tories lost to Labour.
I will confess that I voted Labour believing they had to be better than the Tories, I’m unlikely to do that again!
Don’t get fooled again
Whose song was that? The Who?
I’ve emailed my MP. Here’s an easy link to find yours and send via this website – it’s easy! 🙂
https://www.writetothem.com/
Thanks
Please share replies
Will do.
I think I understood that the BOE gave the commercial banks money to punt into the economy by way of commercial loans. Now I’m a big fan of double entry bookkeeping, it helps me get behind the balance sheet of small companies that don’t want me to understand their accounts, but I never dreamed of this consequence. Total insanity. Thanks for pointing this out.
Email sent to my local MP, Gen Kitchen.
Thanks
A bit off topic UT as , I enjoy your posts hereward YouTube videos which regularly point out to Rachel Revves where she can find the money to fund the much needed Winter Fuel Payment allowance, find redress for the Waspi women and avoid oenskuding disabled people more than they are already, I wonder if you hzve any similar suggestions fir the Scottish Government.
This morning I read on Prof John Robertson’s ‘Talking up Scotland’ blog about the Scottish government’s dilemma in wanting to give nurses an 8% payrise but having to wait for the decision in England as what they get under Barnett will depend on how much money NHSEngland is allocated, as, if it is less than previously, that would make it harder for Scotland to afford that pay rise given the sums it already gives to vulnerable Scots to mitigate Westminster policies like the bedroom tax and 2 child cap on benefits.
If you could identify a pot of money they could use, I’m sure Scottish nurses would be very grateful!
(Though I realise the financial constraints Scotgov face as a non self-governing territory are very different from England.)
The problem for Scotland is that it cannot in its current state create money. It needs to be independent.
Apologies for all the typos above but the box for writing the comment is quite small and I have Glaucoma!
Understood
And thank you
Great article Richard. I keep forwarding your videos to others in the hope of spreading the word. You raise a hugely important central point. I think we are scared the financial sector will leave these shores after every other sector has been destroyed . What you have highlighted is a bribe. Truly shocking.
I have written to my MP. We will see if he responds. My fear is that he believes in the elected dictatorship that passes for democracy in the UK. That might mean he ignores my email. I’ll let you know.
Thanks
Has anyone emailed Rachel Reeves? I’ve written three emails to my new MP in 2 months, so thought I should try a different approach. All attempts just end up with ‘find your mp’. Pen and paper? That address I can find. Palace of Westminster SW1A 0AA.
What has worked for me in the past is writing to the minister and attaching that document to an email to your MP requesting it be forwarded to the Minister/Sec of State/Chancellor/PM.
Then a civil servant/PPS in their private office will draft a reply for the Minister to sign. If you are lucky. Directly writing to the minister is not technically allowed.
The system, by design, distances gov’t from the people.
Thanks
Many thanks.
I’m pleased to say I did get a response from my MP who says he has written to the Treasury. I followed up with Clive Parry’s caveats.
Thanks
Nigel Hargreaves, glad you’ve got such an MP. Do you want to say who it is? I’d like to have my spirits raised 🙂
It’s Neil Duncan-Jordan. I’ll let Richard know by email if he gets a response from the Treasury.
Thanks