Savings Rates Slashed as Banks Receive Government Boost

The top rates of savings accounts have been slashed by banks up and down the high street since the government announced a cash injection of £80billion to start them lending again.

The key to the government’s plan is to give the banks capital which they can lend out to businesses, charging the normal interest rates and reaping the rewards of repayments. However, seeing as this money is coming from the taxpayer, the banks have much less to lose if the borrower defaults.

This should, in theory, mean that it is easier for people, especially small businesses, to get the money they need from the banks as the banks will not be keeping their purse strings quite as tight; they will be willing to take more risks.

However, the flip side of this is that banks no longer need as much money from savers; normal bank lending works by taking money from savers, lending it out to borrowers and then giving the saver some of the interest from the loan repayments. With the government handing over £80billion to the banks, they no longer have to rely so heavily on savers. This means that they don’t have to offer higher interest rates to them and can keep more of the profits for themselves.

The effects of the money are already clear to see; Santander has already dropped its 3.3% ISA rate and ING has reduced the highest savings rate they offer by 0.11%.

There has been plenty of criticism of this approach as many remain unconvinced that giving the banks the money has encouraged them to lend any more than they already would have; it’s certainly been true that businesses are still complaining about a lack of available loans. Whether these approaches actually work, only the banks themselves know, and they’re keeping quiet whilst the cash rolls in.