This article from the Times Online makes abundantly clear that UK banks do not plan to pass on any future base rate cuts by the Bank of England to customers. However it does not do a very good job of explaining why the bankers think they will not be sufficiently profitable if they add the same margin they get now to an even lower policy rate.

We have seen a similar problem here, but the reasons are pretty clear. Spreads on mortgage products have risen even as Treasuries have fallen, leading to only a modest improvement in borrowing rates. The reason here is that the volatility of interest rates has risen considerably, and that makes the consumer’s mortgage prepayment option more valuable, which increases the required spread.

From the Times Online:

High Street banks have told Alistair Darling they will not pass on any further interest rate cuts to consumers and businesses. The banks have warned the chancellor they are “not charities”. They said they could not afford further to reduce mortgage payments and interest rates to businesses if, as expected, the Bank of England continued to cut rates as the economy fell deeper into recession.

Yves here. One could contest the banks’ view. They enjoy a unique role, protected by special licensing requirements, of taking customers’ deposits. And as we have seen, at least for large players, large banks are not permitted to fail. Losses are socialized. Darling may lack the authority, but he could counter by threatening to pull the banking charter of the non-compliant and tell them to make a go of functioning in those businesses that did not benefit from the state restricting entry. I am not familiar with the rules here, but a long time ago, I looked into what the consequences for a foreign bank operating in the US of giving up its US banking license. It would have had a big impact, meaning very significant revenue losses, mainly because they would have lost access to certain clearing and transfer services (in those days, Fedwire and Swift) which were very important to their home market clients. The impact would be far more significant for a native country player.

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