Banks are not your friend. They exist to exploit you, and they will whenever they can.
This is the audio version:
Banks want to keep you in debt.
I know they produce those lovely cuddly adverts that imply that they're your friend, helping you out as you go through life, but all of that is complete and utter nonsense. Banks exist for one reason and one reason only, and that is to keep you in debt. Everything else that they do is peripheral to that goal.
Now let's just, for the sake of the record, have a look at what they really do.
Firstly, they do a lot of bookkeeping for you. You might not think of it in that way, but that's actually what most of banking is all about. They maintain your bank account, and all that is, is a bookkeeping process.
You tell them to reduce the balance in your bank account and increase the balance in somebody else's bank account, which is, after all, what happens when you make a payment, and they record it.
You ask your employer to make a payment to you at the end of the month, and the bank records it.
This is bookkeeping. It's important. I will not dispute that. They have to get it right. That's vital. But nobody, and let me be honest about this, and I have a lot of experience to back this claim up, has ever made a fortune out of bookkeeping. It's just not that sort of activity. It's routine. It's becoming increasingly automated, partly by you because, of course, you probably now do online banking, meaning that you actually do the bookkeeping for the bank itself, and it will become even more automated using AI.
Nonetheless, that is the first, and perhaps in real terms, most fundamental role of banks in the UK and other economies around the world.
The second thing that banks do is borrow money. They borrow money from you. If you have what you call money in the bank, you have lent the bank that money. It's no longer your money, by the way. It's their money. You've lent it to them. They now own it. They owe it back to you. But you own that debt from the bank, not the money itself. It's a very important point to remember, because banks can fail. But the important point is that banks borrow from you to provide them with what is called capital in the event that there's a run on the bank and their creditors, who are other depositors, turn up and demand their money back.
That's why they borrow money.
They don't borrow money to lend. We'll get to that in a minute. They borrow to pay out creditors in the event of a panic.
Now, the fact is that in the UK, there has only been one such panic since 1860, which was the run on Northern Rock in 2007, as a result of which, the government guaranteed all the deposits in Northern Rock and every single person got paid, and they introduced the scheme that now guarantees the balances in every bank account in the UK up to £120,000, meaning that the chance of another run on a bank is very low indeed because people know that they don't need to panic in the event of such an eventuality arising, and therefore the amount that the bank is willing to pay you to deposit money with them because they don't think that the risk of a run arising is very high, is very low. That's why they're so mean with the interest that they pay on your savings.
And then the third thing that banks do is they lend money, and this is where they make their money. The vast majority of their money is made by lending because they charge people to borrow money a great deal more than they pay to people who deposit money with them. But that's because the two transactions are entirely unrelated to each other.
I've made videos about this before, and no doubt I will make videos about this again, but when a bank creates a loan, it does not lend a depositor's money to the person who gets the loan. They can't because they still owe that money back to the person who deposited it with them. They can't, therefore, lend it to somebody else without getting an agreement between the person who deposited it and the person who would borrow it, and there is no such agreement between those people. They've never spoken to each other. They don't know who each other is.
The bank creates new money when it lends. It simply marks up the loan account of the person to whom they lend money with the sum of, let's call it £10,000, which they make as a loan, and they mark up the person's current account with £10,000. One, of course, is a debit. One, of course, is a credit. That means, in layperson's terms, one is borrowed money and one is deposited money, but it's all being made by simply tapping numbers into a keyboard. And because one is a minus, which is another way of thinking of these things, and the other is a plus, which again, is a way of thinking about these things, if you add them together, they come to zero, which is how the bank can create the money out of nothing. They just split zero into two equal parts of £10,000, one a plus and one a minus, and there's still zero. But the person who now has money in their current account thinks they can spend it. And because of the credibility of the bank, which has been licensed by the Bank of England, everybody accepts that they can spend it. That's how banks lend money.
But notice two things. First of all, it costs them nothing to create the money that they lend. I mean, literally nothing at all, apart from the few minutes it takes for a person to tap the numbers into the keyboard. So, okay, a tiny, tiny cost to create the loan, but nothing like the scale of the charges that they're now going to make in terms of interest.
And remember that they also charge you a risk fee. When they lend money to you, they don't just charge you a pure interest charge. If they did, they would lend money to you at the Bank of England base rate. They don't. They will lend at an interest rate several times higher than that, and if you borrow on a credit card, maybe seven or eight times that, sometimes, because they're allowing for the fact that some people will not repay, and they charge for that as well.
But at the end of the day, this is their core business and where they make their money. And if they got you out of debt, if they were that nice, cuddly, friendly person who comes up to you and says, we can sort out your financial problems, we can arrange that you are no longer in debt, which is what most people would love to be, they would have no business left.
There would be nothing for them to make money from.
They couldn't survive, or they wouldn't at least survive making the extraordinary profits they do, which have driven the world's leading banks into the ranks of the highest-earning companies and highest-value companies in the world.
So these banks are determined that you stay in debt, and before you, by the way, contradict me and say, but that isn't the three things that a bank does, because banks also sell life assurance and other types of financial products - yes, they do do those things. They sell pensions as well, but they aren't core banking activities. Other organisations can do that. They just choose to compete with them because they're conglomerate organisations. I am talking here about banks' role as bankers, and they only do those three things. They bookkeep, they borrow and they lend.
And so, when we think about the role of banks in our economy, they have one entirely pernicious role as far as you're concerned, and that is to keep you in debt. They want you to be in hock with them from now until the end of life, if it is at all possible, which is why they now sell mortgages that last for such long terms, and the reason why they want to keep you in debt is that they make money out of you as a consequence.
There is a good reason why mortgages are called mortgages, by the way. The term mortgage, if you look at its derivation, comes from the words which represent 'the grip of death'. And that's what they're trying to do. They're trying to keep you in debt to them forever. Credit cards, mortgages, car loans, whatever else it is. All of those things, backed up by the power of advertising to make sure that you want the things that you cannot afford at present, guarantee that the banks will make money in perpetuity.
So, my advice is this: it's very simple, it's very straightforward, and it's blunt. Never trust a bank. They will never have your best interests at heart. They will always be putting their priorities above your own, and they will always be trying to fleece you. It's a simple, straightforward rule of life.
Use them when you need to for the bookkeeping, because you won't pay much for that.
Use them if you want to deposit money somewhere safe, because they probably are pretty safe, because the government guarantees the repayment of your funds.
But whenever you can avoid borrowing, because borrowing is designed to make you miserable, because you'll have less money available to you than you might otherwise.
I can't pretend that you'll go through life without borrowing. I have. I know that the vast majority of people do. We need homes. Most of us have to buy them using mortgages, but wherever you can keep clear of bankers because they really, really do not care about you.
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My understanding is that the UK government now guarantees the balances in every bank account in the UK up to £120,000?
Yes
Good advice as always. To highlight the point in question, although only relevant in France where we live. We had a car loan to repay over a five year period, once the amount reduced to 10,000€ we decided to repay it back in full because in France a loan of 10k or less carries no interest if paid off in full. The bank however told us that interest was included in the sum so there was no gain in paying it off! Untrue of course but an example of understanding what your bank loan means. I suspect UK banks would never offer a loan scheme like this.
Good advice.
If you avoid borrowing – ie. keep your current account out of overdraft, repay your credit card in full every month by direct debit and shop around for a place to keep your savings then the UK banks offer a pretty good deal – you typically pay nothing to run your account and several banks offer very attractive savings accounts (but check you are covered by the Government Guarantee). These services are quite expensive to deliver. “Know Your Customer” and anti-money laundering rules must be followed, fraud runs at about £1 billion a year (and the bank nearly always takes the hit – not you), IT systems need updating and maintaining and yes, there still are physical branches that are hideously expensive as well as ATMs.
Who pays for all this “free” stuff? Well, as Richard points out, it is borrowers. Not only are they paying bankers’ salaries they are also subsidising those that use the system “for free”. (I would add that “lazy savers” – those that keep large balances in their current account – also pay…. but let’s be clear it’s mainly borrowers that pay).
Those that DO need to borrow to buy a house should not worry too much about being ripped off. Base tracker mortgages are offered at about 1/4% over Base Rate which is pretty competitive (versus other countries and other borrowers in sterling)…. this is the “exception that proves the rule”.
Thanks
I assume banks earn interest on customers’ money left in current accounts which they don’t pass on, by and large. Then there are the hidden transaction fees – see below. So I don’t think there’s much altruism going on here.
@ Cliff B
Yes, banks typically do not pay interest on current accounts but, all other things being equal if my current account goes up £1 then the bank’s reserve account balance at the BoE goes up £1… which attracts interest at the Base Rate.
Hidden fees? Yes, SWIFT transfer prices and FX rates are scandalous.
Spot on, the only thing I would add is the protection is now £120,000 and also never borrow on a credit card but if you are disciplined you can use them for the additional protection that is conferred on purchases over £100, which means that if you have a problem with a purchase the bank is also liable.
Quite right, Steve. Last year, I bought a Gift Token for a Special Day Out for my son’s 50th birthday, deciding to pay by credit card.
It promised a helicopter ride and a chance to drive a “supercar”. Despite sons best efforts he was unable to actually make a booking. All it took was one phone call to the bank just before the expiry date of said token and the money was refunded there and than. Easiest interchange with my bank for may a long year!
As someone who chose to bank with Nationwide because of their cooperative and ethical claims, it was somewhat galling to see CEO Debbie Crosbie voted through a potential £7m pay package last year. A pay ratio with a junior employee of around 280.
Nationwide chair Kevin Parry defended the package as necessary to attract talent and match similar roles elsewhere, not as personal greed.
Ethical? Yeah, right.
Fact check – the deposit guarantee is now increased to, I think, £120k, £240k for joint accounts.
A few days after some conversations with my bank about digital exclusion, branch closures and why I didn’t trust either their integrity or the security of their systems, and wouldn’t be using their app, I read this…
https://www.bbc.co.uk/news/articles/c4g23npxpwgo
Some things never change. Remember when ATMs “never made mistales” and “Chip &PIN” was a secure technology?
I recommend the documentary “Spank the Banker”
https://m.youtube.com/watch?v=iTZGAS6wgzM&pp=0gcJCZoBo7VqN5tD
Pay special attention to how the banks’ lawyers and Boards handled the criminality of their senior managers.
I meet some decent kind bank staff. But my trust for the organisations is below zero. There is too much criminality about.
Totally agree .
Never a lender nor a borrower be. The banks have way too much freedom to lend, it only helps create volatile booms and busts. See Minsky.
On a side note the BoE recently raised tge deposit protectuon limit to £125K. Yet another subsidy to the banks.
https://www.bankofengland.co.uk/news/2025/november/pra-confirms-fscs-deposit-limit-to-be-increased-to-120000-from-1-december#:~:text=News%20release,strength%20of%20our%20financial%20system.%E2%80%9D
Banks’ transaction fees are also an area of concern, especially in relation to the newer banks, and also the way the fees are layered. A requirement for greater transparency might help. And of course whoever is charged the fees, it’s the ordinary consumer who ends up paying.
All the more reason we should have a not for profit government bank. So people who need to borrow are not exploited. Also breaking the banks cartel by giving some proper competition
I don’t want to be pedantic, Richard, the the FSCS compensation limit was increased from £85,000 to £120,000 from 1 December 2025. We need a resurgence of the building society concept, methinks. Actually building houses on a local basis.
I have an ISA account with the Ecology Building Society. They do actually finance house building.
They are a buulding society. They bank with a bank
As far as I can see, Ecology currently pay 2.80% interest on their cash ISA, which is not ‘competitive’ if a higher rate is one’s motivation, as, for instance, the Harpenden Building Society currently pays 4.06% on ‘easy access’. The Ecology’s standard variable interest rate on mortgages for self-build up to 80% loan to value is 5.89% so, the ‘margin’ here is 3.09% in this example – of course, some mortgages will have discounts, etc., but Ecology is not a charity, as good as they are in specific circumstances.
Isn’t the government guarantee now £120K, not £85K?
Richard,
A couple of points/questions.
First, if banks don’t lend customer deposits, bank runs would simply not be possible or ever happen. The fact that they do means the guarantee scheme is in place to prevent it.
Secondly, banks need to themselves borrow to cover any lending. This is basic asset/liability accounting, which you should be aware of.
Lastly, you say retail banking is extraordinarily profitable. Could you tell me what those profit margins are roughly for a couple of the usual UK retail banks?
@Henry
“First, if banks don’t lend customer deposits, bank runs would simply not be possible or ever happen. The fact that they do means the guarantee scheme is in place to prevent it.”
Did you really foolishly sign over the rights to “act as the owner” of your cash deposits to your bank? I certainly didn’t.
On the other hand, I certainly expect my bank to safely store my money. “In their vault” isn’t a safe place. Banking my money with the Bank of England is. And that is what banks do – especially as the Bank of England pays interest to the commercial banks on those reserve deposits.
So what causes a “run on the bank”?
Mostly, as I understand it, is the fear, whether mistaken or not, that a bank has made loans against a customer’s promise to repay, guaranteed by the value of that asset reverting to the bank if the loan is not repaid – and the asset is later found to be worthless. Multiplied again and again.
If the bank has to repay its customers by cashing in – worthless – assets, the panic arises: will *my* cash be caught up in repaying someone else, even though the bank should (eventually) raise the funds to pay me? Even if the bank has to sell worthy assets: will a “fire sale” raise enough cash?
That’s when people start queuing to withdraw their money “to be safe”, and panic spreads: a bank run is born.
Co-operative Bank is now owned by one of the larger building societies, the Coventry – still a bank in the usual sense, of course. Hopefully, Coventry, which is known for good administration, can resolve many of the issues that have plagued Co-operative Bank for many years on and off. Unity Bank are interesting for business banking, and several clients find Triodos Bank acceptable. They are still both banks, making money. Reliance Bank, originally set up by the Salvation Army in 1890 are interesting, too. Still a bank, though…
[…] accept my apologies. I made a mistake this morning. The video on banking was made in April last year. We reissued it because I am on holiday and we did not have enough […]
The government owned National Savings and Investments has an unlimited guarantee. It uses this fact to promote itself. It holds about £240bn and has 24 million customers. One question is the money held part of the National debt?
Yes, it is.
Hi Richard. I’d be interested to know your assessment of Credit Unions versus commercial banks and mutual building societues. And what do you think of shared ownership schemes (buying say 25% of a new build home and paying a fair rent to a housing association on the 75% they would own). Should they be made more easily available for people to buy second hand properties (they is currently only one housing association, Heylo, who do this)?
I am on holiday
Sorry Richard, enjoy your holiday.
It is a sobering thought (or should be) that we currently gift financial institutions the best part of £1.5 billion per week in interest payments (The Money Charity). This of course is a direct transfer of wealth from the government, the currency issuers, via ourselves, to said institutions.
Richard I would like for you to comment on an incredibly bold (and in my opinion incredibly wrong) statement made few years ago by Nino Galloni, an Italian economist very sympathetic to MMT and the endogenous money school argument. Galloni held a very senior position in the Italian Treasury in the 1980s, he was a student of Federico Caffe’ and classmate of Mario Draghi.
Unfortunately I cannot track down the video where Galloni states that because banks can create money out of thin air we should change bank accounting rules when a loan default occur. He claims that for the bank that event should be simply treated as a loss of profit and not an outright loss for the entire amount. Frankly, I could not believe what I heard. When a bank “creates” money (which is really credit) the recipient of that money can do whatever it wants with it, he can leave it in the same bank (if he/she banks in the same institution) or that money can be moved (immediately or later) to another bank, in that case the loan originating bank has to come up with its own reserve balance to make that transfer. So, yes the bank can create credit money out of thin air but when a default occur, the bank is still on the hook for that amount. Is this a lack of understanding of basic bank accounting (which I find it hard to believe from someone with Galloni’s background) or I’m missing something here? Thank You!
I agree with your conclusions that banks live off their debtors by charging them interest. If such interest rates were fair, few people would quibble; most people need to borrow at various times in their lives.
I have long advocated stricter gov control of interest rates to avoid exploitation of borrowers and usury. Anything over 10 per cent seems unjustified, even accepting that many of the debts will not be repaid.
As you say, the money they are lending is created from nothing, so if it is not repaid, in effect nothing is lost. Loan sharks have to have ready cash to lend out and cannot just create money as banks do.