Big banks will make you poorer

by Ed Bowsher on 18 June 2009  |  0 comments
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Big banks can hold a government to ransom. They can also make you poorer.

I really liked Mervyn King's big City speech last night.

Amongst other things he said: "If some banks are thought to be too big to fail, then ... they are too big."

I agree. Big banks can hold a government to ransom. They can follow risky strategies in the knowledge that if the risky moves fail, the government will bail them out.

What's more, if the banking market is dominated by a few big players, it's easier for those players to jack up rates and margins. All at the expense of the consumer.

We've seen this happen over the last few months. In the world of property, fixed rate mortgages are on the up. That's partly because swap rates are rising too, but the lenders have also increased their margins above the swap rates. For a five year fixed-rate mortgage, the average margin last month was 1.84 points. A  year ago, the margin was 0.87 points. That's quite an increase.

It's a similar story when it comes to loans. According to research by Zopa, UK banks are now charging an 8.6% spread between the rates they charge for loans and the rates they pay on savings. This is one of the largest spreads ever.*

It's even worse with credit cards. The average rate on credit-card purchases has risen from 16.3% in June 2007 to 18.1% today. That's ridiculous when the Bank of England's base rate has tumbled from 5.5% to 0.5% over the period.

True, these rises are partly driven by the big banks' need to shore up their balance sheets. But I suspect that competition is also an issue. The mortgage market is far less competitive  now that Alliance & Leicester and Bradford  & Bingley have both merged with Abbey. And, of course, HBOS has merged with Lloyds TSB.

Going forward, the next government should definitely try to increase the number of players in the retail banking market. If the structure continues unchanged, the big banks will gradually get richer, and we'll all be poorer. 

* The average loan APR on £5000 over 36 months is 12.0%. The average return to savers is 3.4%. (Zopa figures).

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