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Averting Disaster: Why bank penalty charges are hurting the wider economy.
Towards the beginning of 2007 one of the most succesful consumer campaigns in history was gathering momentum. Collectively the biggest banks in the UK shelled out over £1 billion refunding customers who has been charged around £35 a time for the crime of having no money left in their bank accounts. Individual claim amounts varied from the low hunderds to £1000's of pounds.
Since Aug 2007 the banks have been able to continue to levy these charges, but consumers have been unable to claim them back pending a decision from the high courts.
At the same time as the test case started the UK has experienced one of the worst banking crisis's since the pound was kicked out of the ERM.
There is no doubt that the main clearing banks have been able to use this opportunity to rebuild their balance sheets which have been wrecked by non performing loans by continuing to levy these charges.
Superficially the banks may think that they are onto a winner, having fought the OFT case aggressively and obtaining the continued ability to charge fees as before. This has no doubt allowed them to postpone further short term pain as the credit crisis continues.
It is highly likely that this short term view by the banks may actually end up causing more damage to their balance sheets than they imagine.
At £35 a time a penalty charge is equal to a monthly gas bill, mobile phone bill or SKY subscription.
This comes at a time when consumers are being faced with massive cost pressures. Inflation is rising, mortgage cost are up and many households have other borrowings on which the interest rate is increasing.
As a bank charge is taken at source (e.g ripped from a bank account at the discretion of the bank) it is the other payments which then cannot be paid.
These additional payments (e.g credit card payments) often support other borrowing elsewhere in the economy. Given the nature of fractional reserve banking the leverage could be up to 10:1. If payments on these other household commitments now cannot be made, the pain inflicted on bank balance sheets may actually be worse than if they had simply stopped charging people for going overdrawn.
Indeed it is easy to see how a bank charge of £35 is now a loss of disposable income which cannot be spent on the high street. If this happens on a wide scale (and it does, bank charges affect millions of people), spending will slow and shops will be unable to meet commercial rent obligations, which in turn affects commercial property values, which in turn affect loans held by the banks.
Given the speed which the global credit crisis has emerged it now seems critical that in order to speed the circulation of money, and attempt to prevent any additional slowdown in the wider economy bank charges need to be immediately halted in all forms and all money owing to customers refunded.
There exists a legal, orderly process to inject billions or pounds in direct liquidity to the area of the economy where it is needed most - the hands of consumers. This is even setting aside the fact that it is the right thing to do since the money belongs to them anyway.
It is not yet too late to put this into motion and the benefits will be felt almost immediately, not least by the banks themselves. - but time waits for no man - and it is running out
Towards the beginning of 2007 one of the most succesful consumer campaigns in history was gathering momentum. Collectively the biggest banks in the UK shelled out over £1 billion refunding customers who has been charged around £35 a time for the crime of having no money left in their bank accounts. Individual claim amounts varied from the low hunderds to £1000's of pounds.
Since Aug 2007 the banks have been able to continue to levy these charges, but consumers have been unable to claim them back pending a decision from the high courts.
At the same time as the test case started the UK has experienced one of the worst banking crisis's since the pound was kicked out of the ERM.
There is no doubt that the main clearing banks have been able to use this opportunity to rebuild their balance sheets which have been wrecked by non performing loans by continuing to levy these charges.
Superficially the banks may think that they are onto a winner, having fought the OFT case aggressively and obtaining the continued ability to charge fees as before. This has no doubt allowed them to postpone further short term pain as the credit crisis continues.
It is highly likely that this short term view by the banks may actually end up causing more damage to their balance sheets than they imagine.
At £35 a time a penalty charge is equal to a monthly gas bill, mobile phone bill or SKY subscription.
This comes at a time when consumers are being faced with massive cost pressures. Inflation is rising, mortgage cost are up and many households have other borrowings on which the interest rate is increasing.
As a bank charge is taken at source (e.g ripped from a bank account at the discretion of the bank) it is the other payments which then cannot be paid.
These additional payments (e.g credit card payments) often support other borrowing elsewhere in the economy. Given the nature of fractional reserve banking the leverage could be up to 10:1. If payments on these other household commitments now cannot be made, the pain inflicted on bank balance sheets may actually be worse than if they had simply stopped charging people for going overdrawn.
Indeed it is easy to see how a bank charge of £35 is now a loss of disposable income which cannot be spent on the high street. If this happens on a wide scale (and it does, bank charges affect millions of people), spending will slow and shops will be unable to meet commercial rent obligations, which in turn affects commercial property values, which in turn affect loans held by the banks.
Given the speed which the global credit crisis has emerged it now seems critical that in order to speed the circulation of money, and attempt to prevent any additional slowdown in the wider economy bank charges need to be immediately halted in all forms and all money owing to customers refunded.
There exists a legal, orderly process to inject billions or pounds in direct liquidity to the area of the economy where it is needed most - the hands of consumers. This is even setting aside the fact that it is the right thing to do since the money belongs to them anyway.
It is not yet too late to put this into motion and the benefits will be felt almost immediately, not least by the banks themselves. - but time waits for no man - and it is running out
