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July 28, 2016

Why are banks planning to charge business customers to deposit money?

“The basic business model of high street banking is to profit from the “margin” between the interest rate at which banks lend to borrowers and the interest rate they pay out to depositors. The Bank of England sets the costof borrowing throughout the economy with its base rate, dragging the private banks in its wake. When the Bank cuts the base rate low the interest rate charged on the borrowing of the public (mortgages, personal loans and business loans) also gets squeezed down.

“But the rate that banks pay on deposits has a natural floor of zero. This is because the assumption has long been that if they charged customers for their deposits people would simply pull money out of the bank and keep it in cash in safes, or even under their mattresses. So the zero lower bound on deposits and a falling lending rate means the bank’s margin gets squeezed – and if the base rate goes below zero the margin disappears altogether.”

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No. “Any excuse to gouge clients” is the verdict of Robert Jenkins, a senior fellow at Better Markets on RBS’s letter. Jenkins argues that banks could absorb the cost of negative base rates by paying their executives less – and that this would be a small price to pay for rebuilding trust with their much put upon business clients.

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To read the full Independent article by Ben Chu click here.

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