Is it self-interest that stops the Government ensuring savers receive fair returns?

At the recent press conference for the publication of the Bank of England’s Quarterly Inflation report, Mervyn King, the Governor, defended the recent lending record of banks – fewer loans at increased rates – by referring to the high costs banks were facing in obtaining funds.

This statement might raise a few eyebrows amongst UK savers, who have over £1 trillion deposited with banks and building societies. They are a major source of the funds that are lent out, but are currently receiving the lowest interest rates they can remember.

Banks raise the money they lend out from two main sources: either retail deposits, which are our savings, or the wholesale funding markets, ie from other financial institutions, companies, councils etc. Up until recently the cost of borrowing these wholesale funds has been more expensive compared to pre-crisis levels and also compared to retail deposits, perhaps explaining Mr King’s assertion.However, the cost of funding from the wholesale markets recently fell, making retail funds relatively more expensive. As a result savers have just been hit by a spate of rate cuts.

In its Financial Stability report published last June, the Bank stated that at the end of 2009 just 15% (£475 billion) of customer loans were financed from wholesale funding.  This figure, known as the “customer funding gap”, was at its lowest rate since 2003.

So, despite the fact that it may only provide a small proportion of banks’ funds, it seems that the wholesale funding market has direct influence over the rates that are offered to the rest of us.

It has been widely reported that the gap between the interest rates on loans and those on savings is at an all-time high, and that this is a major factor in the recent recovery of banks’ profits.

The problem for savers is that as individuals we do not hold any clout with the banks when it comes to negotiating rates, and of course we have to put our money somewhere.

So can it be right that the returns available to savers are solely left to the mercies of supply and demand in a market largely controlled by a small number of major banks whose profits are inversely related to the returns given to savers?

Given that the Government has repeatedly acknowledged the importance of savings and stated its intention that households should be encouraged to save, should it not be ensuring that these savings receive a fair return from those in a position to profit from them?

Or is it that the Government is content to let the situation carry on. It obviously suits an indebted Government for interest rates to be low.  And as a major shareholder in the banks it has a vested interest in enabling them to make a profit, so that when it sells the shares – more than likely directly or indirectly back to savers whose lack of returns have contributed to the rising share price – they will be worth more.

It is the height of hypocrisy, and an insult to savers, for a government that claims to support saving to allow banks to make such large profits from savers’ money which is languishing in deposit accounts earning less than inflation and slowly devaluing on a daily basis.

Jason Riddle is a co-founder of Save Our Savers

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