Egg acts over 'risky' customers, (RISKY, yeah right !)

[CF93]

You fail at banking....

What difference is it to the bank if they are paying 4% interest on 1000 accounts with £500 in or one account with £500,000? It all adds up to the same amount.

The savings help pay for the loans side of the business, the more cash they have in savings the less it costs them to give out loans, allow credit cards etc. Banks like having lots of saving customers, it means they don't need to borrow money to finance their debtors, like for example Northern Rock...

I fail at banking....I beg to differ
I've got a degree in Accounting & Finance and have spent the last ten years working in Banking, the last five as a Senior Officer in the Treasury of one of the largest building societies in the country.

A lot of customers with £500 each is actually less profitable than one customer with £500,000 - one customer with £500k is less likely to withdraw all that much in one go, meaning the bank can tie it up in loans on the wholesale/credit markets for longer, and actually earn more interest (if the yield curve is positive.) A lot of customers with small balances means there is more chance of large withdrawals all in one go, meaning cash can only be tied up for shorter periods, earning less interest. It's easier to predict customer behavior for one high value customer than lots of small value customers.
It's obviously not that simple though!

As has been said, savings are used to finance loans and credit which are much more profitable than the savings themselves.

For example, a bank might pay you 5% interest, but it will take your money and lend it out on, say, a credit card at something like typically 16% interest or more.
That portion it doesn't lend out in credit goes on the wholesale market, which will earn little more than that 5%. For example in August/September the LIBOR rate was around 5.8% which was quite high - it's lower now that rates have fallen and the spread to the BoE Repo rate has fallen - meaning that back then the bank makes just 0.8% on that 5% savings account, and that's before deductions for operating expenses etc. Of course it depends on the T&Cs of the account and the rate etc etc etc....

All these banks eg HSBC and Lloyds offering 8% on savings are making little to no money on those accounts (and may well be running at a loss) - they get you by tying you to their current accounts on which they pay didly interest but they get your "current" cash to lend out, and that's where the profit comes from.

Also, a lot (sometimes all) of the savings rates are swapped using interest rate swaps, but that's a whole other story

 

[Richdog]

I fail at banking....I beg to differ
I've got a degree in Accounting & Finance and have spent the last ten years working in Banking, the last five as a Senior Officer in the Treasury of one of the largest building societies in the country.

Ouch...

 

[andyp]

I fail at banking....I beg to differ
I've got a degree in Accounting & Finance and have spent the last ten years working in Banking, the last five as a Senior Officer in the Treasury of one of the largest building societies in the country.

A lot of customers with £500 each is actually less profitable than one customer with £500,000 - one customer with £500k is less likely to withdraw all that much in one go, meaning the bank can tie it up in loans on the wholesale/credit markets for longer, and actually earn more interest (if the yield curve is positive.) A lot of customers with small balances means there is more chance of large withdrawals all in one go, meaning cash can only be tied up for shorter periods, earning less interest. It's easier to predict customer behavior for one high value customer than lots of small value customers.
It's obviously not that simple though!

As has been said, savings are used to finance loans and credit which are much more profitable than the savings themselves.

For example, a bank might pay you 5% interest, but it will take your money and lend it out on, say, a credit card at something like typically 16% interest or more.
That portion it doesn't lend out in credit goes on the wholesale market, which will earn little more than that 5%. For example in August/September the LIBOR rate was around 5.8% which was quite high - it's lower now that rates have fallen and the spread to the BoE Repo rate has fallen - meaning that back then the bank makes just 0.8% on that 5% savings account, and that's before deductions for operating expenses etc. Of course it depends on the T&Cs of the account and the rate etc etc etc....

All these banks eg HSBC and Lloyds offering 8% on savings are making little to no money on those accounts (and may well be running at a loss) - they get you by tying you to their current accounts on which they pay didly interest but they get your "current" cash to lend out, and that's where the profit comes from.

Also, a lot (sometimes all) of the savings rates are swapped using interest rate swaps, but that's a whole other story

What you put in bold doesn't match what you put in italics.

That's not how it works, banks do not lend out people's savings or the money deposited in current accounts.

So this part especially is just tosh...

As has been said, savings are used to finance loans and credit which are much more profitable than the savings themselves.

So untrue I really cannot believe you have the qualifications you claim to have.

And if you do have said qualifications/experience, then I really am completely flabbergasted at your lack of knowledge.

 

[b3mor]

What you put in bold doesn't match what you put in italics.

That's not how it works, banks do not lend out people's savings or the money deposited in current accounts.

So this part especially is just tosh...



So untrue I really cannot believe you have the qualifications you claim to have.

And if you do have said qualifications/experience, then I really am completely flabbergasted at your lack of knowledge.

Are you being serious? I am by no means an expert but I am pretty sure CF93 is right, the money made available to the banks in the form of savings and the money in bank accounts is used to make more money. I was under the impression huge sums of customers money is used to create profits through short term investments on a daily basis and over the longer term through loans?

Why do you think savings are not used to finance loans? What do you think the banks do with the money?

 

[Goberpiles316]

I have been with Egg as a customer for around 5 years and I have just been told to get my coat this morning. Oh well.

 

[CF93]

That's not how it works, banks do not lend out people's savings or the money deposited in current accounts.

So what do you think they do with it? Leave it there doing nothing?

Of course not.

Banks have a process known as "squaring." The aim of the Treasury function is to "square" the books each day. That means taking - in real time - all the details of all money coming in and going out, and then once the tills are closed to retail customers, look at whether they have a cash surplus (ie money in the bank) or a shortage (ie they are overdrawn) and then either lend or borrow accordingly. Of course, the bank will engineer its position on the wholesale markets throughout the day to maximise profits based on how rates move during the day (you think rates only change once a month? Try hundreds of times a day!)
The aim is to ensure that at the end of the day there is no money in the banks own accounts (as close to zero as poss without being overdrawn.)

Why - because they will not earn any interest on a surplus balance, but will get charged if they are overdrawn (even a bank has to bank with someone - for clearing banks, it's the Bank of England, for non-clearing banks it can be any bank. Did you know for example that JPMorgan in the UK banks with NatWest, Northern Rock banks with the Co-Op, UBS banks with Barclays, etc etc etc.) So they borrow at the cheapest rate they can find if they're overdrawn (since that will be less than the charges which are typically the higher of the highest LIBOR overnight rate on the day and the repo rate+1%) and if they've got a suplus they lend it out to earn interest to maximise income.

Typically, an average customer only ever withdraws up to 5 to 10% of their account balance in any one given working day. That means if an account has £1000 in it, the bank can typically rely on around £900ish not being taken out, and so they can use that to lend out to make a profit (which they use to pay interest on the account.) If the customer does withdraw more, then that is covered by the fact the bank will have maturing wholesale trades and new deposits giving income to cover it. It just means the banks end of day balance before they "square up" is lower.

And credit cards etc are definitely more profitable, mine charges 16.9% for example, but there's no way it costs them that much to get the money to cover it (and where exactly does the money I borrow on that card come from??)

So if I'm wrong, explain to me then how it works?

If you want proof of my qualifications and experience, I'll happily email a photo of me holding my degree cert and CV.

I didn't post to start an argument though.