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I gather there are some bright economists on here, so I wonder if anybody could answer a simple question that's been bothering me for a while; I can't find it being asked anywhere else.

Why are interest rates so high?

It appears that banks & building socs. are able to borrow money at base rate (i. e. 0.5%), yet lend money at 5 to 10 times that rate. Surely that's a ridiculous margin. Is there really no viable competition?

It leads me to another question - why can't the BoE set up a subsidiary arm to lend at a rate of, say 1%? At face value it would seem to be a win-win situation for the BoE & the borrowers.

I appreciate it's a highly complex situation & it would no doubt be difficult to implement the necessary innovations, but the financial institutions' margins seem just plain ludicrous to me - far greater than anybody else's in the business world - & there must surely be room for competition.

I may also be completely misunderstanding the situation; I'm sure someone will enlighten me!

I wonder what Vince would think??

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Why are interest rates so high?

Thoughts from a non -economist - the banks who lend out the dosh for mortgages etc are trying their best to make as much profit as possible and this might have something to do with the big black holes in their balance sheets and amount of risk they've exposed themselves to in other countries - like Spain, Ireland who are in a well dodgy state. I don't believe for a minute they've got to the bottom of how much debt is sat on their balance sheets - and how much future debt there will be in future when some more chickens come home to roost. Like the one on another new thread today about a property company going bust.

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I gather there are some bright economists on here, so I wonder if anybody could answer a simple question that's been bothering me for a while; I can't find it being asked anywhere else.

Why are interest rates so high?

So that banks can repair their crippled balance sheets without the interest rate they're charging in order to do so then tipping their customers into bankruptcy and repossession - which would then put an even bigger hole in the banks' balance sheets.

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It leads me to another question - why can't the BoE set up a subsidiary arm to lend at a rate of, say 1%? At face value it would seem to be a win-win situation for the BoE & the borrowers.

They can and it's recently been proposed by the BoE deputy governor that they should do just that for needy sectors - though housing wasn't mentioned by name. But remember that to do so would either [a] harm the banks who therefore lose customers or involve lending to people the banks didn't want to lend to - probably with good reason.

Edited by tpbeta

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It leads me to another question - why can't the BoE set up a subsidiary arm to lend at a rate of, say 1%? At face value it would seem to be a win-win situation for the BoE & the borrowers.

Cheap credit plus weapons of mass destruction caused this mess in the first place, probably not wise to turn on the cheap money tap again.

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I gather there are some bright economists on here, so I wonder if anybody could answer a simple question that's been bothering me for a while; I can't find it being asked anywhere else.

Why are interest rates so high?

Because money is in high demand. The banks need it to sort out their balance sheets. So they've stopped lending to each other, and stopped giving it away cheap. Investors have stopped giving it away free as they believe the days of easy profits are over.

It's a vicious circle, and the CB's are trying to persuade everyone that money's still available. But no-one's buying it enough to get IR's down, as they think the CB's won't risk a hyperinflationary scenario by printing until we're all spending again.

It's all a big poker game where the CB's are trying to bluff the markets, and the markets are assuming that the CB's aren't mad enough to go all in.

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A bright economist wouldn't have even considered this question since they're always too busy in the detail. Thicker economist would say this:

The banking system is insolvent and being recapitalised. Banks are sitting on massive losses and these are underwritten by the taxpayer. In order that the taxpayer doesn't suffer a loss on its investment in the banking sector, the banks must recoup from somewhere. In order that thje government doesn't make a loss on its investment in banks, banks must make large profits and be subsidised.

In normal times, the Bank of England lends "money" at no risk because it accepts only the very best collateral - gilts.

If the BOE sets the base rate at 0.5%, then if a bank wants to lend money for less good collateral, it has to do so at an interest rate higher than 0.5%.

If a bank wants to make a loan and accept collateral with a 1% risk of loss, then if bank charges 1% they will, on average, breakeven.

However, they can get 0.5% 'profit' risk free, so in practice they would have to price a loan at 0.5% + 1% risk + profit margin, maybe 1%. So 2.5%.

Today, the Bank accepts poorer quality collateral which isn't worth lending at for 0.5%. It might have an extra risk of 2%.

The BOE still lends at 0.5% but the banks making loans know that the collateral is crappy and so add 2% on to the margin. So 4.5%.

That's why a borrower will only get a good rate if they look almost as good as gilts and that means someone with 60% LTV, squeaky clean credit, high income to loan.

First time buyers are more or less screwed without a borrower with good collateral standing behind them. And even then, the rates are high.

There never is full or proper competition in markets where governments intervene in unexpected ways.

I gather there are some bright economists on here, so I wonder if anybody could answer a simple question that's been bothering me for a while; I can't find it being asked anywhere else.

Why are interest rates so high?

It appears that banks & building socs. are able to borrow money at base rate (i. e. 0.5%), yet lend money at 5 to 10 times that rate. Surely that's a ridiculous margin. Is there really no viable competition?

It leads me to another question - why can't the BoE set up a subsidiary arm to lend at a rate of, say 1%? At face value it would seem to be a win-win situation for the BoE & the borrowers.

I appreciate it's a highly complex situation & it would no doubt be difficult to implement the necessary innovations, but the financial institutions' margins seem just plain ludicrous to me - far greater than anybody else's in the business world - & there must surely be room for competition.

I may also be completely misunderstanding the situation; I'm sure someone will enlighten me!

I wonder what Vince would think??

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Thanks for your replies. At least it seems my original understanding was correct, - not always the case!

I can't help but feel something smells though. Do banks really need 1% to cover bad loans? That means 1 in 100 pays zilch capital back (I'm approximating a bit). If we're talking about mortgages that makes even less sense; even if you lend at 100% valuation then (whatever people here think) you're extremely unlikely to get less than half your money back, even at auction, & probably close to 3/4.

All in all 1he original 1 in 100 capital loss by default risk probably comes down to 1 in 30 or less.

Anyone know what the repossession rate is? And the average loss on repossession? It would be interesting to know.

Anyway, if f you're expecting to lose 3 or 4% of your capital each year as a result of poor lending - which is your business expertise after all - then you're a crap lender & deserve to go under. I reckon a decent lender who knows his market should be able to reduce his loss margin down to around 0.5%, & getting close to zero in the boom years - which is when he should be building up reserves.

And how much would it cost to run an internet type lending bank?? If you said 1%, that still means you end up with a realistic interest rate of around 2%.

I really don't understand the point about banks 'needing to build up their reserves'. So businesses are allowed to overcharge their customers because they messed up big time in the past? I think any such business (in a genuinely competitive environment) wouldn't be in business very long.

And if all this means that too much cheap money comes onto the market, well then there's an easy solution.

Increase bank rate.

Foreign confidence increases. Gilt rates would go up (I think). Once reserves were back up there'd be more money available for GENUINE investment with a bit of risk involved.

I think what I'm really saying is: why can't the BoE provide more competition for the banks & encourage new (& more efficient) ones.

I don't like government intervention, but the present quasi-monopoly is not working, & someone with a lot of clout is required to make the market work properly.

It's just occurred to me that perhaps the reason intervention has been such a bad thing is that it has always been the standard recourse of left wing governments, who fundamentally disagree with free markets & believe they need to dictate people's needs & desires. Intervening to create better, freer markets by people who believe in them (& understand them - just as necessary!) is a different thing.

Over to you Vince?

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I really don't understand the point about banks 'needing to build up their reserves'. So businesses are allowed to overcharge their customers because they messed up big time in the past? I think any such business (in a genuinely competitive environment) wouldn't be in business very long.

I think the penny is dropping. Welcome to the world of Zombie banks.

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  • 146 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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