Continued stoozing good for the banks?

Richard019

With the latest interest rate cut it does look quite bad for the future of stoozing as it is now going to be difficult for people to make a profit.

Smaller stoozers shouldn't have a problem for another year as alongside ISAs it should be possible to get 1 year fixed rate current accounts (A+L and Abbey having the highest rates at the moment) purely for stooze pots to go into. (ensuring the minimum deposit is met by moving the required amount each way between the two accounts in the middle of the month).

For larger stoozers though it seems to becoming less and less worth while, and isn't that bad for the banks in terms of liquidity?

This is all based on the idea that if we have a credit limit of £5k on a credit card, the card provider has to have in place the money to cover that limit if we decide to use it. If that's wrong then there's no need to read further, just tell me so.

Now withan active stoozer you have £5k debt with Bank A. Bank A has in turn potentially got that covered with a loan from Bank B because it doesn't have enough of it's own deposits. Coincidentally Bank B is where you have your stooze pot, so Bank A is effectively being loaned it's own money to cover itself.

If stoozing suddenly becomes unprofitable though you're left with a £5k limit at Bank A and no money in Bank B. As Bank A doesn't have it's own deposits needs to have a loan to cover that available limit. Bank B suddenly doesn't have enough money to make the loan so Bank A is in trouble and either has to pay more or rapidly reduce credit limits to get back in control.

I agree the 2nd is most likely, but doesn't that also set off alarm bells with the public when a bank starts doing that which just makes the problem worse.

I dont think stoozing is as widespread as it could be, but you've also got the idea that the withdrawal of funds (stoozepots) over a sustained period (we're talking a year before people's deals run out) could be seen as a run (jog would probably be a better description) on the banks and when figures for deposits are announced again cause general concern.

YorkshireBoy

Richard019 wrote: »

...isn't that bad for the banks in terms of liquidity?

The banks lose money on every stooz, even with 3% BT fees.

Bank A has in turn potentially got that covered with a loan from Bank B because it doesn't have enough of it's own deposits.

At current LIBOR (and even if the banks *would* lend to each other), the cost of borrowing is greater than the 3% BT fee.

Coincidentally Bank B is where you have your stooze pot, so Bank A is effectively being loaned it's own money to cover itself.

Isn't that one of the causes of the credit crunch in the first place?

...the withdrawal of funds (stoozepots) over a sustained period (we're talking a year before people's deals run out) could be seen as a run

You're assuming every stoozer's deal would be expiring at the same time though...unlikely?

Richard019

YorkshireBoy wrote: »

The banks lose money on every stooz, even with 3% BT fees.

I'm aware the banks lose on them in the hope we won't be able to repay or that we'll become regular users with them or that we won't leave to go elsewhere. I was more thinking of the problem of the markets not having the money in them for that bank to cover the soon to be unused limits.

YorkshireBoy wrote: »

Isn't that one of the causes of the credit crunch in the first place?

Yes, but with the additional factor of other banks no longer being prepared to loan them it being the final straw that caused the collapse? Surely the other banks suddenly losing deposits would make them less willing to lend?

YorkshireBoy wrote: »

You're assuming every stoozer's deal would be expiring at the same time though...unlikely?

I'm not, the sustained period of a year is covering deals ending now right through to those ending in a year's time. If it's not profitable then people won't take new deals in that time so deposits will drop whilst limits remain, that's why jog was a better term to use than run.

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I don't expect it in itself to be a major problem, it's more the fact that the press have been one of the biggest causes of general panic that has made things as bad as they are. In the wake of Northern Rock wasn't there some expert quoted as saying that the best way to cause a run on a bank is to run a news story saying there's going to be a run on that bank?

You can almost guarantee that if there are enough stoozers about that the press will pick up the story about slightly smaller levels of deposits and unchanged credit availability and turn it into a financial meltdown that will see everybody lose every penny they've got in order to sell a few extra copies that day.

From a personal point of view I'm cancelling the unused cards as and when the deals expire. That's all in the hope that once rates go back up or my mortgage is up for renewal I'll be able to get better offers that way. As a first time buyer who had a 30% deposit I'm now swinging around that golden 75% LTV mark with another 3 1/2 years left on my fixed rate, so it could make the difference. I just don't expect the majority to do that unless dormancy fees are added.

sdooley

Richard019 wrote: »

This is all based on the idea that if we have a credit limit of £5k on a credit card, the card provider has to have in place the money to cover that limit if we decide to use it. If that's wrong then there's no need to read further, just tell me so.

Credit card companies do not have to hold cash for existing but undrawn lines of credit. They just work on a daily/monthly funding basis based on historical patterns of credit demand, increasing or cutting credit limits if they have surplus funds available. Credit card companies will have their own 'credit card' - a revolving credit facility such as an overdraft, line of credit or for the really huge firms a securitisation programme. They can draw down on that up to their own limit but will pay less for funds which are available but undrawn. Of course the banks have other sources of funding for credit cards, including customer deposits. On top of that all solvent financial institutions can borrow overnight in the money markets - although you wouldn't want to rely on that too much at the moment.

savemoney

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realaledrinker

sdooley wrote: »

Credit card companies do not have to hold cash for existing but undrawn lines of credit.

They do need to hold additional capital to cover undrawn balances since the introduction of Basel Accord in 2007. One reason why unused credit card limits were being cut back even before the credit crunch took hold.