Tuesday 21 August 2012

Tuesday, August 21, 2012 Posted by Jake 7 comments Labels: , ,
Posted by Jake on Tuesday, August 21, 2012 with 7 comments | Labels: , ,

Which?, the consumer campaigner, has claimed free "free banking" is a myth. The British Bankers Association (BBA) has called Which? disingenuous, claiming that "Charges can be avoided completely simply by not going overdrawn". 

Let’s put to one side for the moment the massive fees and sky high interest that borrowers are charged. The point the BBA hopes to blind us to is that they also take money from savers. Banks lend out money deposited by savers. Banks pay interest to the saver that is a tiny fraction of the interest they take by lending the savers' money to borrowers. Banks keep that difference - called the "net credit interest" - when they should be paying much more to the savers.

An Office of Fair Trading report in 2009 showed that banks took £4billion in "net credit interest":

“The two main sources of revenue from PCAs [Personal Current Accounts] are net credit interest and unarranged overdraft charges. Although the perception of banking is that it is free, in 2006 PCA providers' total revenue from PCAs was £8.3 billion, equating to £152 per active PCA. Of this, £4.1 billion came from net credit interest”

These figures were for 2006, since when interest paid to us on our deposits has fallen further, and the cost of our loans has risen. The staggering size of this rip-off can be seen from these figures from the Bank of England.

Let's say you are £1,000 in credit, and the bank pays you 0.5% interest. In one year you will get £5.

The bank lends your £1,000 to someone with an overdraft, charging them 15% interest. The bank takes £150 by lending your money to this person.

The bank gets to keep £145 of the interest earned by lending out your money, and gives you £5. 

The banks are effectively charging you 96% of the money earned by lending out your money.

If an estate agent rents out the flat you invested in, they may take 15% commission. When banks 'rent out' your money you have saved, they can take 96% commission!

And they claim personal current accounts are free! The scoundrels!!


  1. 'Free' at the point of rip-off they mean.

    Just as it is 'free' to use a credit card, except everything is priced to take into account the average 1.5% commission paid to the banks.

  2. I hate to defend banks but of course they have to make money/cover their costs somehow. Banking isn't 'free' to provide (expensive staff, buildings, equipment etc as well as profits) so why should anyone think it's free to consume?

    The question is whether the consumer gets good value- I'd argue some do (if you're using the bank to make lots of transactions and keep your money safe) but many savers don't (if you've got a large cash balance but are not being paid much interest).

    The alternative is investing your money where you lose the security of the bank guarantees but get to keep all of the growth achieved by putting your money to work (minus typically about 1%pa explicit costs).

    1. We don't object to charging in principal. We object to the banks pretending personal current accounts are 'free'.

      And to add insult to injury, the new Barclays chairman, Sir David Walker, says all the mis-selling to consumers and businesses was "the consequence of not charging for bank accounts"! Blimey!

  3. Not sure this is what happens.
    I've not found a straight answer but the zeigeist movies on youtube are a good place to start.

    As I understand it banks don't lend you other people's savings.
    They create brand new money for your loan out of nothing.
    You must pay this loan/new money back at some point with the interest they add to your debt.
    As it is brand new money where does the money come from to pay back the extra interest that was added to your loan but not created?
    From new loans to other people.
    So more money must be created to satisfy the interest on previous loans.
    What gives money value? How much money exists in the money supply.
    As the money supply increases, £10 is worth less than it was when there was less money in existence.
    This is where inflation comes from - we must have inflation as we must increase the money supply in order to pay the interest on previous loans.

    Poorer people are the ones with the cash flow. The poor spend money when they get it as they don't have all they need to live. The rich horde money - this is why they are rich - they don't need it to live on.

    Money is debt and debt is required for us to trade. If we all paid our debts there would be no money in existence - so when Cameron tells us to pay our debts off it's a little more complicated than you'd think. Apart from that it's mathematically impossible to pay off all debt as any money created comes into existence with debt added to it from the start.

    The rich hold all the debt and won't spend it. There's no work for the poor. The poor are paying down their debt to the banks to reduce their exposure.

    There's not enough money flow - hence Quantitative Easing, hence inflation.

    Please don't just discount the above as poop. Please wake up and most importantly, do your own checking and find out for yourself.

    1. You're talking about Fractional Reserve Banking. It is widely accepted as part of the cause of the bank crisis. See...

      Here's our post from March 2011: "Why companies don't just target the rich - because the poor have most of the cashflow"...


    2. These two videos give some insight into how people's savings are multiplied:

  4. Said by Sir David Walker to the Treasury Select Committee in May 2012, before he became chairman of Barclays Bank in August 2012:

    "I think what boards allowed to happen was-business units who were eager to distribute these new products on which the margins were fat and where the senior management were persuaded, 'We are providing something that meets the needs of our customers', at least customer-friendly. I think senior management or leadership were taken in by that and should have had a firmer line. I hope from now on, in the light of the experience of PPI and this swap stuff and so on, we will have much less"

    Said by Sir David Walker in August 2012, after becoming chairman of Barclays Bank: He branded recent mis-selling episodes, such as interest rate swaps to small companies and payment protection insurance, as

    "the consequence of not charging for bank accounts".


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