We\’re ruled by cretins.

Alistair Darling summoned the chief executives of Britain’s biggest banks to Downing Street early this morning to demand they pass on the Bank of England’s interest rate cut to their customers.

Treasury sources confirmed to Times Online that the Chancellor told the heads of all Britain’s major high street lenders – including HSBC, Barclays, LloydsTSB, HBOS and Abbey – to implement rate cuts immediately.

Yesterday the Bank of England slashed interest rates by 1.5 per cent to 3 per cent, their lowest level in 53 years.

But banks have dragged their heels in passing on the rate cut, arguing LIBOR, the overnight inter-bank rate at which they lend to each other, has remained stubbornly high despite official reductions in the base rate.

LIBOR is the rate which determines the price at which banks can borrow. It is thus the rate which determines the rate at which they can lend (with, of course, a mark up for costs and risk). The base rate influences LIBOR, of course, but it doesn\’t determine it.

16 thoughts on “Cretins”

  1. Now that some, if not all, of the banks have been taken over the state, no doubt we will hear politicians and commentators argue that as part of the price for receiving money from the taxpayer, self-same taxpayers are entitled to receive the impact of the rate cut. In other words, what goes out of my right pocket is paid into my left.

    And for this, Gordon Brown is called a “statesman”.

  2. Is this the same Chancellor, via the FSA, that increased the capital requirements of the banks which reduced that amount they can lend?

  3. Kit,

    No. This is the same Chancellor that did as the EU instructed and increased capital requirements of the banks, which reduced the amount they can lend and bounced a number of them into requesting taxpayer assistance.

    A question: What might the interbank lending rate be between two taxpayer supported banks? There is little risk so I would imagine the rate is much lower than normal. So low it is probably discounted from the LIBOR calculations.

  4. “LIBOR is the rate which determines the price at which banks can borrow. ”

    I thought LIBOR was just an average of what banks are charging each other?

    In which case two points:

    1) Are your statements correct Tim?

    2) The arguments quoted in the last paragraph of the Time article are completely inverted. No banker would argue that BECAUSE of LIBOR, they cannot reduce lending rates. LIBOR is calculated as a result of what they are already doing.

    Am I confused or correct? Please help.

  5. *sigh*

    As Andy points out, LIBOR is largely irrelevant, as is BoE base rate. If banks want to borrow from BoE they have to pay a premium on top of that of 1% last time I looked.

    Ultimately, the largest interest expense for banks is the rate paid on deposits, savings, money market borrowings and bonds. Add on 1% or 2% for overheads and profits, that gives you the mortgage rate, plus risk premium etc etc.

    These two figures must be in some sort of equilibrium. In any event, all banks are not all borrowing at LIBOR, some will be lending at LIBOR. They can’t all be borrowing at the same time. The spread of LIBOR over BoE lending rate is a useful as a measure of how much banks (mis)trust each other, but not much more than that.


  6. Get real, Tim. The Chamcellor no more believes it than you do. He is merely trying to persuade the public that he is doing something, that he is in control of events, just like his boss.

  7. Echoing “ifabloke”, The government is doing a brilliant job of persuading the public that the whole mess is the banks’ fault- which is what they have to do to get re-elected. As a bonus they might get a mandate to acquire some more banks.

  8. Regardless of whether this tactic is right, I don’t get the strategy. Are the Government trying to bail out banks at risk of going under or members of the public at risk of losing their savings? I thought they’d made this decision already, opting to prop up banks and declining to guarantee ordinary people’s savings. OK, so (granted, for sake of argument, that the Chancellor’s logic is sound) surely refusing to pass on an interest rate cut is a good thing? It would increase banks’ profits, taking them further away from going under, which was the whole point. If they want the benefits of their largesse to reach the public, why not cut out the middlemen and just give money to people who lose their savings?

  9. If Libor is more important than the BoE rate, then why doesn’t the MPC set the Libor rate instead? Or whatever rate MW thinks is more important, obviously.

  10. “If Libor is more important than the BoE rate, then why doesn’t the MPC set the Libor rate instead?”

    Let me explain: LIBOR is a benchmark indicator. Like the FTSE100. Like the inflation rate. Like the $/£ rate. Like the average price of houses. Like the mean temperature in London in summer. The MPC can set LIBOR as much as it can set these (i.e. it can’t).

    The Guardianistas who know nothing technical matters are yet all to keen to tell us how a Fabian take on the world will solve all ills. In response we should simply bop them on the head with a cardboard tube.

  11. The MPC can’t set LIBOR; it’s a dynamic measure of risk and return.

    What amuses me about the efforts to get Banks to “pass on the cuts” is that many have, today; the Darling Brown Bank (otherwise known as the Crock) which they own outright in trust for the taxpayer hasn’t made an announcement (or hadn’t as at 4 pm today).

    And when BoE BR went down 0.5% last month they didn’t pass it all on. And their SVR is just about the highest there is.

  12. Well Northern Rock has cut by 1.5%. But I don’t really get your point – I presume you mean the government should run it as nationalised concern, and tell it what to do. But then current Tories, and many others, would be highly critical for the simple reason that should the government run just one bank? It’s a bit statist, and surely uncompetitive.

  13. No, my point was simply the irony of Darling running round making veiled threats and whipping up the meejah, while his own creature – which one might have been expected to be the first to show the others the way – lags in the background. And signally failed to do last time what he wants this time.

    Nothing more complicated – sorry.

  14. If the papers were willing to investigate, rather than just report, they might try to get the government to explain how bankers can be simultaneously greedy for reckless overlending and then greedy for being disinclined to lend. Three weeks ago they were worried about the viability of some of these institutions, now they’re demanding they cut their margins (with consequent negative repercussions for bond and share holders that seem to be going unmentioned).

    This government’s approach to the credit crunch seems to have all the strategic consideration of a game of spin the bottle.

  15. “while his own creature – which one might have been expected to be the first to show the others the way – lags in the background”

    It’s not allowed to. It can’t be too competitive because this breaks EU state aid rules. So it can’t have the best savings rates (a bunch of accounts were taken off the market shortly after nationalisation) and it can’t have the best mortgage rates either.

    Nor can the Government just instruct the banks where it holds a majority or significant stake: that disadvantages the other shareholders and is illegal too.

    It’s left playing the nod-and-wink game.

  16. I think this post reinforces that iron law of British blogging – that when Tim calls someone a ‘cretin’ he’s about to get his argument completely wrong.

    “Tim adds: No, not quite. What Mark and others above are missing is opportunity cost. LIBOR determines the rate at which a bank will lend, plus costs and risk premium, because LIBOR is the price at which a bank can lend absent those retail costs and risks. If they lend to consumers at less than LIBOR then they lose money which they could have made. Opportunity costs then.”

    But anyway – practically speaking I’ll note that all three of my savings accounts have managed to get letters in the post and delivered to my door by Friday midday informing me of a cut in their savings rate, but my two creditors seem not to have managed it by saturday morning.

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