Lenders 'failing to pass on rate cuts', says Bank of England
A report has found that high Street banks have failed to pass on base rate cuts in full to household borrowers.
Rates charged on some loans has in fact risen, according to an article in the Bank of England's quarterly bulletin.
Part of this is due to high borrowing costs encountered by banks themselves - which hasn't fallen as steeply as base rates along with more more substantial charges caused by high default risk.
However, it is also apparent that a large part could also be down to banks pricing in larger profit margins.
The Bank of England cut base rates from 5% to 0.5% as a direct response to the credit crunch and recession.
However, rates on secured loans, which including
mortgages, have fallen around 2.5% since the middle of 2008, to the current rate of about 3.75%.
The typical rate on unsecured loans such as
personal loans and
credit card debt increased during the same period from around 8.5% to almost 11%.
These figures show that banks have been charging a much larger mark-up on lending to individuals compared to the Bank's benchmark policy rate.
The mark-up was partly explained by the rate at which banks can borrow over the longer term.
This "funding rate" has not fallen as fast as base rates, as banks are seen as riskier, and because base rates will rise in the future.
Banks are also charging more as a result of higher losses on loans from higher default rates by borrowers which is particularly bad for unsecured loans where the bank has no collateral to rely on.
However, the difference was also down to an unexplained "residual" factor in the Bank's number-crunching analysis.
This residual was negative until the middle of 2008, which suggests that banks were so aggressive throughout the credit boom that they were actually lending money to borrowers at an expected loss.
After the financial crisis it turned sharply positive - so banks were chargingan unjustifiable amount by their funding rate together with expected losses on bad loans.
The Bank of England's report said this could have been down to banks increasing profits in order to build up capital reserves allowing them to meet stricter regulatory requirements; increasing profits on new loans to try to claw back some of the money lost on existing loans; or the fact that banks have been unable to lower deposit rates as much as they would have liked to, because the deposit rate can't be cut below zero.
Lenders 'failing to pass on rate cuts', says Bank of England
By: Sam Gooch
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