Mervyn King: Rate cut would put building societies at risk

[Martin@AS Financial]

I seem to recall C+G had a bit of an issue when there was a point at which some of their tracker deals went negative about 3 years ago. They couldn't calculate zero or negative rates.

Very true - I believe the lifetime tracker was about 1.01% below base. They had to issue as statement saying they would not be paying out to their clients on these mortgages.

This led to a number of lenders such as Nationwide imposing floors on their tracker products so as not to be caught out.

[AtW]

Reducing the base rate still means they make the same margin.

You make wrong assumption that banks can borrow at BoE rate at any time, that's not the case - BoE now wants to accept tulipy assets in exchange for funding charged at BoE rate to stop increase in costs of mortgages.

Oh and when banks have good deal (those on 0.49% over BoE rate) they have to make up for difference by charging other customers more

[ASB]

When I first started advising on mortgages, I was arranging life time trackers upto 1% below BOE base rate. These days, the cheapest products are around 2% above which look great until base rate does eventually start to rise.

I seem to recall C+G had a bit of an issue when there was a point at which some of their tracker deals went negative about 3 years ago. They couldn't calculate zero or negative rates.

[Scrag Meister]

I am curious how reducing the BOE base rate actually affects the margin that the bank take.

I have 2 mortgages, first one at 3.29 above base and the other at .49 above base.

Reducing the base rate still means they make the same margin.

[Martin@AS Financial]

So now maintaining fat bank margins on mortgages is part of Bank of England's responsibilities?

It's not like banks get slim margins - back in normal age of 5% interest rates mortgages were 7%+, now with 0.5% rate mortgages are what - 4%? Hardly worse margin!

When I first started advising on mortgages, I was arranging life time trackers upto 1% below BOE base rate. These days, the cheapest products are around 2% above which look great until base rate does eventually start to rise.

[AtW]

Bank of England governor Mervyn King says the potential impact on building societies’ margins is part of the reason why the Bank of England has deployed quantitative easing rather than cutting interest rates further.

So now maintaining fat bank margins on mortgages is part of Bank of England's responsibilities?

It's not like banks get slim margins - back in normal age of 5% interest rates mortgages were 7%+, now with 0.5% rate mortgages are what - 4%? Hardly worse margin!

[Martin@AS Financial]

A reduction in Base Rate doesn't seem to be on the cards

Taken from Mortgage Strategy:

Bank of England governor Mervyn King says the potential impact on building societies’ margins is part of the reason why the Bank of England has deployed quantitative easing rather than cutting interest rates further.
King in front of the TSC this morning
Asked this morning by Treasury Select Committee chair Andrew Tyrie why the Bank had not accepted the International Monetary Fund’s suggestion the UK should consider a rate cut to 0.25%, King said building societies have warned him that this would hit their margins and risked pushing them out of the market.
King said: “Arguments that led us not to go below 50 basis points are still in play. We are concerned we would squeeze the net interest margin, particularly for smaller building societies and that would make their position vulnerable. I do not think pushing out small building societies from the market would be a wise course to pursue.”
Nationwide has in excess of £50bn worth of mortgages on a standard variable rate capped at 2% above base rate. According to its preliminary results, published in April, this is having a £750m “adverse impact” on annual group profits.
Both King and Monetary Policy Committee external member David Miles told MPs the Bank’s QE programme, worth £325bn to date, will in any case have a greater impact than a rate cut.
King says: “A very small cut in base rate will not make a big difference what we have been doing with asset purchases. That is, in our opinion, very much bigger than a cut of 25 or even 50 basis points.”
Miles said there was a question mark over whether a cut in rates would lead to lower costs and better availability of credit or higher demand in the economy.
He says: “Because there is that issue with some building societies and other lenders about it squeezing their profitability I think there is at least a question mark over whether a rate cut would do any good. As long as we have other effective levers, which we do in QE, cutting rates is not the most attractive policy.”