You know, that deposit rates haven’t risen like lending rates thing?
From Lloyds 2006:
The banking net interest margin decreased by 6 basis points to 2.78 per cent. Much of this margin decline has been caused by the impact of
lower earnings on the Group’s capital and other interest-free liabilities and, excluding this funding impact, the margin was broadly stable year
on year. The banking net interest margin in the second half of 2005 actually increased by 5 basis points to 2.80 per cent, compared with
2.75 per cent in the first half of 2005.
From memory that net margin’s about 2.83 at present.
So, things have returned to normal after 15 years of suppression then.
Shrug.
And why in markets should the margin be any particular figure?
And why in markets should the margin be any particular figure?
They shouldn’t and they aren’t. The point in making the comparison is that before the era of qe stimulated low interest rates, the spread was about the same as it is now and the difference between what on average is charged to borrowers and what is paid to depositors reaches this kind of equilibrium.
@ mjohnm
The “net interest margin” is the difference between interest received and interest paid per £100 of loans *before* losses due to bad debts and operating expenses.
So, in a competitive environment it will equal the expected bad loss ratio plus the cost of regulatory capital (the equity or near-equity capital that the regulator insists that the bank holds to guarantee the safety of its depositors during a bad year) plus the operating costs of premises and staff (excluding from the latter those attrubitable its side-businesses like insurance andinvestment services).
If the “net interest margin” is less the bank will make losses and gradually go out of business as it has to shrink in line with the shrinking amount of its equity capital. If it is much greater its competitors will tempt customers away by offerring a better deal with higher deposit rates or lower borrowing rates.
Does that explain it?
By “in markets,” I was making the point that margins are governed by competition. Thanks for the detail.
Relatively few comments on this one Tom, but I really like this one. Cheers.
i