Don't blame the campaigners for the end of free banking Blog Discussion

nobblyned

CVID wrote: »

There is a totally simple issue here which is not being addressed by the "don't blame the campaigners" mob.

1. The status quo, with essentially free banking for those who stay in credit, has now existed for many years.

2. The only reason that this is now under threat is the campaign being run by the likes of Martin. Nothing else is on the radar which could have produced this scenario.

3. There is no 3. That's it, pure and simple.

Can anyone really blame the millions of careful budgeters who manage their affairs responsibly for viewing this campaign with a jaundiced eye?

I note you don't address the question as to why you believe your banking should be subsidised by unlawful charges on other customers of that bank?

HACZ

nobblyned wrote: »

I note you don't address the question as to why you believe your banking should be subsidised by unlawful charges on other customers of that bank?

I think there are numerous similar examples of this that everybody takes for granted. Those that follow the rules are subsidised by people being penalised for breaking the rules.

For example income from fines etc is paid to the treasury therefor reducing the overall tax burden, late fees at the video store providing an income stream for the business etc, the current banking situation.

There are also examples where those following the rules subsidise those who break them, eg shoplifting, car tax, car insurance, the new proposed way of banking charges.

To answer your question, I don't think I should have banking subsidised by unlawful charges neither do I think that I should subsidise those who don't play by the rules. Lets get some middle ground with reasonable charges that reflect the cost and provide some punitive measure to help stop the problem. Let's educate our young people to manage their money and take responsibility for their actions. Let's help thos who genuinely fall on hard times.

nobblyned

HACZ wrote: »

I think there are numerous similar examples of this that everybody takes for granted. Those that follow the rules are subsidised by people being penalised for breaking the rules.

For example income from fines etc is paid to the treasury therefor reducing the overall tax burden, late fees at the video store providing an income stream for the business etc, the current banking situation.

There are also examples where those following the rules subsidise those who break them, eg shoplifting, car tax, car insurance, the new proposed way of banking charges.

To answer your question, I don't think I should have banking subsidised by unlawful charges neither do I think that I should subsidise those who don't play by the rules. Lets get some middle ground with reasonable charges that reflect the cost and provide some punitive measure to help stop the problem. Let's educate our young people to manage their money and take responsibility for their actions. Let's help thos who genuinely fall on hard times.

The point is that English contract law doesn't allow for punitive measure, only reasonable cost.

To be clear, I too am appalled by the lax financial attitude of some to financial responsibility, but I don't think that unlawful punitive charges adminstered by the banks as a 'corrective force' is fair.

For the record I am not reclaiming bank charges as I have had none.

I'm also wondering how you believe you will, in the future, subsidise those you who previously got punitively charged, as under contract law the banks would be still be able to charge reasonable cost. Hence no subsidy from anyone to anyone - which sounds fair to me.

russelleng

Unless the whole banking market acts as a cartel, then we won't see an end to fees free banking, it's just too bad a business decision because customers will instantly swap their fee charging accounts for the ones that don't.

They can play with little tricks on interest rates because they're kind of hidden, but fee charging to run a simple current account is just too in your face to get away with.

Also, Martin misses out a bit on his argument that they pay you 0.1% on your deposits while lending it out at 18%. Because of the way that banking works in the UK (and most other countries), the banking system can lend out around 10 times the value of your deposits, in effect netting 180%. A quick search on the term 'fractional reserve banking' will show how this system works.

MarkyMarkD

Russell

You are very confused. "Fractional Reserve Banking" is talking about the fact that, pretty obviously to be honest, a bank doesn't keep all of its customer deposits in its back pocket.

Obviously, banks lend out the money that customers deposit with them - how else would they earn money to pay interest - but they keep a small proportion of it available to meet day-to-day withdrawal requirements.

The idea that this is somehow naughty is rubbish. As is the idea that banks can lend out money they don't have - it all has to come from somewhere (at some sort of cost) before it can be lent out.

Some banks pay 0.1% on current accounts; many pay more. The 18% is irrelevant - that's the rate charged to borrowers and that has to cover the bank's operating costs and bad debts (which aren't insignificant) before starting to make any profit.

russelleng

MarkyMarkD, thanks for the post, it was needed for me to recheck my calculations. I was careful to use the term banking system, not bank and I didn't say it was naughty, just that Martin missed out a bit on his comparisons.

This is my interpretation of fractional reserve banking. For the example I have used 10% reserves, but I think that currently the UK keeps to a voluntary level of closer to 3%.

A customer has £100, he pops it into his bank account. This first bank then has to keep £10 in the vault or with their Bank of England account, the other £90 is loaned.

The person who takes out the loan pays for goods and services and eventually that £90 ends up as deposits in bank accounts. These banks then have to keep £9, the other £81 is loaned.

The cycle happens again with the banks having to keep £8.10 and lending the other £72.90.

This cycle continues until people have put a total of £1000 into banks, the original £100 is kept in bank reserves and £900 of loans have been created. No more loans can be created because the original £100 is now held in reserve by various banks.

Now let's look at the profit for the banking system;

Let's say that everyone has decent accounts paying 5% per year, the banks therefore pay out 5% of £1000 which is £50.

Now let's say that everyone got a good loan rate of 10% per year, the banks then earn 10% of £900 which is £90.

So the difference between the 2 values of £90-£50 = £40 is the total income that the banking system could make in 1 year from your decision to put the £100 in the bank rather than keep it in your pocket.

It is correct that if you treat just the first bank in isolation then they would pay out £5 in interest and earn £9 on loan interest payments, making it just £4, but look at the system as a whole and it's worth a lot more.

Now this is just a theoretical situation where the money is static and no-one decides to withdraw any money, keep it as cash, convert to forex or pay off their loans, but I'm still undecided as to whether over time everything will average out and this situation will be reached, or whether the dynamic and international nature of money will stop it from ever reaching the maximum.

So, in conclusion to answer a few of your remarks...

'The idea that this is somehow naughty is rubbish.' - I agree, it's not naughty, it's just that people should be aware just how much their cash is worth to the banking system and also to that original bank who would hope to appear a few times within a single cycle.

'As is the idea that banks can lend out money that they don't have...' - Again, absolutely true if you look at each bank in isolation, but if you look at the totals in my example you can see that the original £100 cash deposit has created a situation in the banking system where up to £900 could be loaned.

As for the operating costs of the bank and defaulted loans, you’re right, just having an income stream from loaned money does not make you profitable if costs are high. To get back to the original topic, I’m sure that reclaimed bank charges are hitting profits at banks, but I’m sceptical that it’s enough to make many banks really consider charging fees for all current accounts.

Anyway, I look forward to some more debate on the subject, especially if I my calculations are incorrect as I’m no economics scholar and don’t yet understand the differences between all the banking ratios out there.

PS - If we were to use a 3% reserve ratio and Martin's extreme examples of 0.1% and 18% then the income value, rather than the £40 in my example, would be over £578!!

HACZ

russelleng wrote: »

MarkyMarkD, thanks for the post, it was needed for me to recheck my calculations. I was careful to use the term banking system, not bank and I didn't say it was naughty, just that Martin missed out a bit on his comparisons.

This is my interpretation of fractional reserve banking. For the example I have used 10% reserves, but I think that currently the UK keeps to a voluntary level of closer to 3%.

A customer has £100, he pops it into his bank account. This first bank then has to keep £10 in the vault or with their Bank of England account, the other £90 is loaned.

The person who takes out the loan pays for goods and services and eventually that £90 ends up as deposits in bank accounts. These banks then have to keep £9, the other £81 is loaned.

The cycle happens again with the banks having to keep £8.10 and lending the other £72.90.

This cycle continues until people have put a total of £1000 into banks, the original £100 is kept in bank reserves and £900 of loans have been created. No more loans can be created because the original £100 is now held in reserve by various banks.

Now let's look at the profit for the banking system;

Let's say that everyone has decent accounts paying 5% per year, the banks therefore pay out 5% of £1000 which is £50.

Now let's say that everyone got a good loan rate of 10% per year, the banks then earn 10% of £900 which is £90.

So the difference between the 2 values of £90-£50 = £40 is the total income that the banking system could make in 1 year from your decision to put the £100 in the bank rather than keep it in your pocket.

It is correct that if you treat just the first bank in isolation then they would pay out £5 in interest and earn £9 on loan interest payments, making it just £4, but look at the system as a whole and it's worth a lot more.

Now this is just a theoretical situation where the money is static and no-one decides to withdraw any money, keep it as cash, convert to forex or pay off their loans, but I'm still undecided as to whether over time everything will average out and this situation will be reached, or whether the dynamic and international nature of money will stop it from ever reaching the maximum.

So, in conclusion to answer a few of your remarks...

'The idea that this is somehow naughty is rubbish.' - I agree, it's not naughty, it's just that people should be aware just how much their cash is worth to the banking system and also to that original bank who would hope to appear a few times within a single cycle.

'As is the idea that banks can lend out money that they don't have...' - Again, absolutely true if you look at each bank in isolation, but if you look at the totals in my example you can see that the original £100 cash deposit has created a situation in the banking system where up to £900 could be loaned.

As for the operating costs of the bank and defaulted loans, you’re right, just having an income stream from loaned money does not make you profitable if costs are high. To get back to the original topic, I’m sure that reclaimed bank charges are hitting profits at banks, but I’m sceptical that it’s enough to make many banks really consider charging fees for all current accounts.

Anyway, I look forward to some more debate on the subject, especially if I my calculations are incorrect as I’m no economics scholar and don’t yet understand the differences between all the banking ratios out there.

PS - If we were to use a 3% reserve ratio and Martin's extreme examples of 0.1% and 18% then the income value, rather than the £40 in my example, would be over £578!!

A nice discussion on the system but one question, if you were lending money would you continually lend to people who don't pay you back when agreed?

At the moment the banks do lend to these people but at a higher rate and with stricter penalties ie the unauthorised charges. I think that unless the banks have some leeway regarding charges they will choose not to offer banking facilities for these people. They will then be forced into "banking" via loan sharks etc. It is not uncommon for some people to be charged £150 for borrowing £100 over a month - I think this makes an unauthorised overdraft fee look small!

As I have said before, people need educating and they need to take responsibility for their actions. Perhaps our efforts and Martins would be better aimed at educating the people at the bottom of the economic scale rather than what I think is the case giving the relatively well off middle classes an excuse to reclaim charges that had they taken the time to deal with their finances properly they wouldn't have incurred in the first place.

Ed_86

As was mentioned on a TV program recently, the massive profits that the banking sector make regardless of whether they are from investments or penalties help a large proportion of the British population with a private pension as these are some of the biggest investors of banks.... so a drop in profits would hit you in your pocket too, just indirectly!

Ed_86

Also further to MArtin's blog post.... the 17.9% discrepancy is the lending and saving rate is obviously not profit... there are massive costs associated with running banks... Ok they shouldn't be making £billions out of 'unlawful' charges but they are as much an admin charge as a deterant!
Speeding for example... £60 and 3 points is only effective because 3 points counts for something the £60 is less of an issue. if it is £2 for going OD or bouncing a cheque where is the deterant?

russelleng

Ed_86 wrote: »

Also further to MArtin's blog post.... the 17.9% discrepancy is the lending and saving rate is obviously not profit... there are massive costs associated with running banks... Ok they shouldn't be making £billions out of 'unlawful' charges but they are as much an admin charge as a deterant!
Speeding for example... £60 and 3 points is only effective because 3 points counts for something the £60 is less of an issue. if it is £2 for going OD or bouncing a cheque where is the deterant?

If it only actually costs £2 to administer the system when someone goes overdrawn or bounces a cheque and people pay that £2, do people need to be deterred from doing it?