Sunday Mail discovers how banks work

[ALB]

Ever since central banks decided to raise the rate of interest they charge commercial banks to borrow money from them (the bank rate) the financial pages of the papers have provided a continual stream of evidence to expose the Thin Air School of Banking as, well, a load of hot air.

Here’s an example from today’s Times:

“The Financial Conduct Authority, which is the industry regulator, also warned the industry last July that ‘the pace and scale at which firms pass through higher interest rates to savers needs to improve’.
Banks have responded to this pressure by improving their savings rates, while depositors have also become more active in managing their money by moving their cash to accounts that pay better rates of interest.
(….)
These deposit trends, combined with more intense competition in the mortgage market, are putting downward pressure on banks’ margins after a period of rapid expansion.
Lloyds Banking Group said in its first-quarter results last week that its net interest margin, which reflects the difference between what it charges for loans and pays on deposits, fell to 2.95 per cent from 3.22 per cent a year earlier.
Similarly, NatWest’s first-quarter margin slid to 2.05 per cent from 2.25 per cent in the same period in 2023.”

Of course banks need deposits — people or institutions lending them money — to function. That’s what they do — borrow money at one rate of interest and lend it at a higher rate. To suggest that banks can, and do, just create out of thin air the money that they lend is just ridiculous.

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