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Big banks keep cuts for themselves

Carney keeps lowering rates, but banks are starting to rebel


 

Big banks keep cuts for themselves

Every Canadian bank claims to be a “leader.” But the decision by the Big Five not to match the Bank of Canada’s interest rate cut last week—for the second time in recent months—has left angry Canadians fuming that the banks should try following for a change.

The surprise move by Bank of Canada Governor Mark Carney to chop the key lending rate by 75 basis points to 1.5 per cent, the lowest in half a century, was meant to provide a jolt to the increasingly moribund Canadian economy. But in the days after the cut, Canada’s largest banks trimmed their prime rate by just half a percentage point, to 3.5 per cent. It was the same story in October, when the banks refused to match the B of C’s half percentage point cut. In that case, the banks wouldn’t budge until Ottawa offered to take $25 billion worth of mortgages off their hands. (Ottawa has since upped its mortgage purchase program to $75 billion.)

While the banks argue the financial crisis has driven up the cost of borrowing, making it unprofitable for them to match the Bank of Canada’s rate cuts, their moves have riled consumers. More and more, it seems like the rates the banks are borrowing at are going down, while the rates for regular folks hold steady. For instance, while the banks’ prime rate has fallen from six per cent to 3.5 per cent since January 2007, the rate on a five-year closed mortgage has actually gone up slightly from 6.65 per cent to 6.75. Some people have launched Facebook protest pages calling for the banks to get in line. “The public needs a break from the banks,” wrote one. “They make enough money already.”

Paul Beaudry, a professor of economics at the University of British Columbia, says the banks may be right to hold off on rate cuts, if it makes them healthier and more able to lend money over the long run. But, he warns, by doing so they could be undermining the Bank of Canada’s efforts to help the economy. “If the banks are not following the cuts, then the whole aspect of what the Bank of Canada wants, which is to aggressively get people out there spending again, may not work.”


 

Big banks keep cuts for themselves

  1. It comes down to that old saw of what’s good for the individual may not, actually, be good for the group.

    Of course, most people don’t want to admit this because the entire basis of capitalism as a useful system relies upon a belief of the exact opposite — that what is good for the individual will eventually become a benefit to society as a whole.

    The banks are acting entirely rationally. Credit is tight, so it makes perfect sense for them to build up their reserves. It would be acting against their own short-term self-interest to start lending the money out at cheaper rates. But wait, cry the capitalists, competition should handle this! And eventually I suppose it will. Some bank will gain the confidence to lower its rates and the others will be forced to follow.

    The problem with this is what happens between now and whenever “eventually” comes about. Because time doesn’t stop while people and banks dither, opportunities can be lost.. sometimes permanently. If consumer confidence and borrowing ability is hampered long enough, it may well take us past a point of no return.

  2. While it wasn’t entirely for reasons of the current situation, I took my money where my mouth is. Walked it over to my local credit union.

    Had been a customer of the same bank for over 30 years. Now am a new customer of Island-based credit union.

  3. Stop wining people. Everyone know that the same people (legislators) who are empowered to oveasea the hen-house are indebted to their cornies in high finance

  4. Do Bank executives have any credibility? these are the very same guys who are shouting from the roof tops that government should go into deficit to pull the economy out of the rut. I am going to go out on a limb and suggest to them that for the next few quarters they need not make massive profits.Give Canadians a break by passing over the savings from the BOC rate cuts. But then that would negatively affect their bonuses. They are going to throw back the argument that rating agencies will down grade their stocks. To that I say, the only reason we are over the precipice and in a quagmire is because these very same agencies gave triple A ratings to issues that they had zero knowledge about and they rated issues as they were paid to rate them.

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