Nationwide BS, how about 40% EAR/APR Overdraft Charges?

[Deleted User]

eskbanker wrote: »

Again you seem unable or unwilling to sustain a consistent and logical line of argument - what possible relevance does a global financial crisis over a decade ago have to a simple calculation of overdraft interest?

Er, thanks for that. Still no idea what your point is though....

Consider the equation, Interest = 300*POWER(1+0.399,31/365)-300 that you accepted.

When a number is raised to the power 1 it remains the same as the number, e.g. 300^1 = 300. The effect is to remove the exponent required for compounding. The resulting interest is higher because an EAR figure is used, e.g. £119.70 = ((1 + 0.399) * £300) - £300.

The value of EAR relates to the Annual Basic Rate (ABR) which is lower. In Excel speak:

ABR = (POWER((EAR+1),1/Number of Days)-1)*Number of Days which becomes:

ABR = 33.59% = (POWER((0.399+1),1/365)-1)*365 or £100.77

Over a year lenders are earning more than they are entitled to because at this point, morally, interest should be calculated using the ABR value of 33.59% instead of the inflated EAR value of 39.9%. When this is scaled to the number of accounts in use lenders risk being accused of usury. The Moral Hazard is that over a year compounding not only creates problems for the account holder it drives inflation upwards a problem for society, globally.

eskbanker

[Deleted User] wrote:

Last edited by WattNext; Today at 11:05 AM. Reason: clarity

:rotfl:

[Deleted User] wrote:

The Moral Hazard is that over a year compounding not only creates problems for the account holder it drives inflation upwards a problem for society, globally.

For anyone borrowing money then it's accepted practice that interest compounds, in exactly the same way that it compounds for savers (AER following an identical principle). It's obviously not straightforward for us normal people to be able to follow your contrived and contorted 'logic' but if you're trying to suggest that the longstanding industry-wide definitions of annual interest rates are somehow about to bring down civilisation as we know it then you probably need a few more tinfoil hats and/or an increase to your medications....

born_again

You borrow money, so expect to pay it back with interest.

We should simply go back to no overdraft for ALL bank accounts. The number of people that live in their overdraft is just stupid.

FCA told banks to stop high interest rates for people spending the banks money. So they switched to a flat rate daily charge. Which the FCA was happy with.
Now the FCA are no longer happy with this flat rate.
So have told banks to go back to charging interest. So the banks are all thinking "Just how high can we go" (and why not) as no guidance was given on how much they could charge.
So expect high rates, that may come down in time due to competition.

But also many are limiting the max amount that can be charged a month, which is much lower than before.

[Deleted User]

eskbanker wrote: »

:rotfl:

For anyone borrowing money then it's accepted practice that interest compounds, in exactly the same way that it compounds for savers (AER following an identical principle). It's obviously not straightforward for us normal people to be able to follow your contrived and contorted 'logic' but if you're trying to suggest that the longstanding industry-wide definitions of annual interest rates are somehow about to bring down civilisation as we know it then you probably need a few more tinfoil hats and/or an increase to your medications....

...It's obviously not straightforward for us normal people to be able to follow your contrived and contorted 'logic'...

Not long ago there was a survey of normal people that went by the catchy name of OECD (2016), “OECD/INFE International Survey of Adult Financial Literacy Competencies” On page 60 its says:

Applied numeracy is an important aspect of this type of knowledge, and one that cannot be fully replaced by digital tools. It is essential that people have a strong foundation in basic calculations such as simple percentages, and rules of thumb that they can apply confidently to help them with financial decisions requiring higher-order mathematics skills such as compound interest.

The Black-Scholes equation was the mathematical justification for trading that plunged the world's banks into catastrophe. Is the difficulty this legacy holds for the banking/finance sector one that the debt is subject to compound interest, it grows, it inflates and everybody is playing catchup?

eskbanker

[Deleted User] wrote:

Not long ago there was a survey of normal people that went by the catchy name of OECD (2016), “OECD/INFE International Survey of Adult Financial Literacy Competencies” On page 60 its says:

Applied numeracy is an important aspect of this type of knowledge, and one that cannot be fully replaced by digital tools. It is essential that people have a strong foundation in basic calculations such as simple percentages, and rules of thumb that they can apply confidently to help them with financial decisions requiring higher-order mathematics skills such as compound interest.

But it's not financial literacy that you're struggling with, you're apparently just unable to articulate any sort of logical construct that clearly explains whatever point you're trying to make. Are you perhaps declaring that you're one of those lacking in applied numeracy and therefore can't understand what compounding really means?

[Deleted User] wrote:

The Black-Scholes equation was the mathematical justification for trading that plunged the world's banks into catastrophe. Is the difficulty this legacy holds for the banking/finance sector one that the debt is subject to compound interest, it grows, it inflates and everybody is playing catchup?

You're really getting a long way out of your depth here! The Black-Scholes equation relates to modelling derivatives and has no relevance to compounding of interest in retail banking, which has of course been the industry norm before, during and after the 2008 crisis, for both savings and loans.

[Deleted User]

eskbanker wrote: »

But it's not financial literacy that you're struggling with, you're apparently just unable to articulate any sort of logical construct that clearly explains whatever point you're trying to make. Are you perhaps declaring that you're one of those lacking in applied numeracy and therefore can't understand what compounding really means?

You're really getting a long way out of your depth here! The Black-Scholes equation relates to modelling derivatives and has no relevance to compounding of interest in retail banking, which has of course been the industry norm before, during and after the 2008 crisis, for both savings and loans.

What you are afraid of is if the money tree is shaken only rotten apples will fall.

The math makes the point that eludes you.

ABR = (POWER((EAR+1),1/Number of Days)-1)*Number of Days:

ABR = 33.59% = (POWER((0.399+1),1/365)-1)*365 or £100.77

On day 1 EAR is appropriate to compounding but progressively as the year unfolds it becomes increasingly inappropriate. On day 365 EAR becomes ABR but banks still charge interest using the higher EAR figure.

When it comes to the Black-(Holes)-Scholes equation everybody is out of their depth because it is rocket science probability. Nobody can predict the future with any real certainty. What the equation does is take a very long term view that you can win but its still a huge gamble and one that the banks wish they had never got involved with.

Paying only the interest on this debt does not reduce the structural or principal amount behind the debt it serves to depresses the interest rate that banks are able to pay on savings accounts. The other factor is that banks must pass a stress test and anticipate shock which boosts reserves but further depresses interest rates on savings.

I noticed you ducked the question of what's happening to the structural debt of banks because derivative swaps became the asset that funded these banks. Is compounding interest on these debts making things worse?

eskbanker

[Deleted User] wrote:

What you are afraid of is if the money tree is shaken only rotten apples will fall.

What I am afraid of is that someone with only the most tenuous grasp of reality has apparently been released into the community.

[Deleted User] wrote:

The math makes the point that eludes you.

ABR = (POWER((EAR+1),1/Number of Days)-1)*Number of Days:

ABR = 33.59% = (POWER((0.399+1),1/365)-1)*365 or £100.77

On day 1 EAR is appropriate to compounding but progressively as the year unfolds it becomes increasingly inappropriate. On day 365 EAR becomes ABR but banks still charge interest using the higher EAR figure.

No, those random warblings don't make any point. Mathematically, EAR is the figure achieved by applying ABR on a regular basis, including the resultant compounding. Therefore EAR is always higher than ABR. EAR is the figure mandated by the FCA as a standardised basis on which to compare loan interest, and so all lenders use it. If you believe that the principle of compounding is unfair then you're welcome to your opinion but that's not going to change anything, and, once it's accepted that compounding takes place, then there is the inevitable difference between the ABR and the EAR, it won't reconcile otherwise.

[Deleted User] wrote:

When it comes to the Black-(Holes)-Scholes equation everybody is out of their depth because it is rocket science probability. Nobody can predict the future with any real certainty. What the equation does is take a very long term view that you can win but its still a huge gamble and one that the banks wish they had never got involved with.

No, can't see how this is relevant to this thread either.

[Deleted User] wrote:

Paying only the interest on this debt does not reduce the structural or principal amount behind the debt it serves to depresses the interest rate that banks are able to pay on savings accounts.

That doesn't follow at all.

[Deleted User] wrote:

The other factor is that banks must pass a stress test and anticipate shock which boosts reserves but further depresses interest rates on savings.

No, that doesn't follow either.

[Deleted User] wrote:

I noticed you ducked the question of what's happening to the structural debt of banks because derivative swaps became the asset that funded these banks. Is compounding interest on these debts making things worse?

I haven't consciously ducked anything but struggle to keep up with your bewildering collection of non-sequiturs, so if these are followed by what appears to be a rhetorical question then it's not surprising it's not answered. But if you're asking if interest compounds on corporate debt in the same way as personal debt then of course the answer is yes.

Would debtors prefer it not to? Well, duh.

Is that relevant in any way? No.

economan

I have two Flexaccounts in total overdraft varying from about £1200 to £1800 per month which brings interest charges of about £24 per month. After 11 November 2019, when the 18.9% rate changes to 39.9%, the interest will become about £51 per month.


This seems an excessive charge to me and is a lot worse than having the old interest rate with charges for exceeding the overdraft limit. It will seriously affect my budget with my pension income and increasing costs, like council tax, energy, etc. I am not sure what to do about it, apart from try to switch banks - to First Direct, possibly.


I did not understand how your £5000 example would cost only £15 per month before the change and £144 after the change.

born_again

economan wrote: »

I
This seems an excessive charge to me and is a lot worse than having the old interest rate with charges for exceeding the overdraft limit.

Blame the regulator.
They are the one's who have forced this change.

Do Nationwide not have a cap on the max monthly charge?

Old rate. For arranged overdrafts of £1,650 for 31 days a month = £24.43
New Rate. For arranged overdrafts of £1,650 for 31 days a month = £47.41

You also have to remember a overdraft is for the short term, not to sit in all the time. As they are not the cheapest form of borrowing.
If it is going to cause you issues. Then look at taking out a loan to put your current accounts in credit and keep them there.

eskbanker

born_again wrote: »

economan wrote: »

This seems an excessive charge to me and is a lot worse than having the old interest rate with charges for exceeding the overdraft limit.

Blame the regulator.
They are the one's who have forced this change.

That's too simplistic IMHO.

As per earlier posts, the regulator action was to simplify overdraft charging by eliminating per-day and fixed charges and differential rates for arranged and unarranged overdrafts.

As above, it seemed inevitable that the effect of this would be that headline EARs would increase, as they'd clearly need to do just to stay neutral (from the bank's perspective) if the other charges were outlawed.

However, I don't believe that the entirety of Nationwide's more-than-doubling of their rate can be laid at the door of the FCA and the cynic would see this as an opportunistic exploitation of the regulatory change. Time will tell how their competitors react....