(Business) Savers: Why The Next Few Years Are Going To Be Bad For Savers

Since the 2007/08 financial crisis it has not been the best of times for savers as interest rates have been at record lows for the last four years and inflation has been creeping up but the main barrier to savers seeing some return on their hard earned cash is the government and its clear preference for borrowers primarily because it’s the biggest borrower of the lot.

Because of this simple fact, savers are forced to try their hand at risky ventures such as the stock market in light of the news that they could lose a whopping “£33bn over the next three years due to new policies on interest rates and inflation”[1].

This current state of affairs is no accident as interest rates have taken a remarkable nosedive over a sustained period as successive governments have looked to pump cheap money into the economy whenever times got tough and even when times were good.  What this has meant for savers is that their hard earned savings had lost some of its value thanks to inflation caused as a direct result of this policy coupled with the government refusal to raise interest rates in order to keep debt cheap for “households and businesses that would be crushed by higher interest rates”[2].

The rationale for this policy offered by government and the Bank of England is that such measures are needed to stimulate the economy but often the policy of flooding economy with cheap money only raises the rate of inflation whittling away at savings, increasing the cost of living in an age where wages have been stagnant. This cannot work for any sustained amount of time as the Government are not really interested in a solution but a stop gap as cost of a real solution will a lot of lost votes come 2015.

This story is important as it reveals the interests of the conservative led coalition government who are not aiming for sustainability or even growth but greater consumption fueled by cheap money refusing to learn the perils of this strategy practiced by the last government. 

In sum, it’s going to be tough for some time to be a saver with the government steadfast in the strategy of pump cheap money into the economy and holding down interest rates which may keep some sense to stability but this policy is no long term solution and savers, sadly, before anybody else, will know this before most.

  

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[1] D.Hyde,2013, Savers ‘condemned to £33bn loss’ by Bank of England,   http://www.telegraph.co.uk/finance/personalfinance/savings/10254044/Savers-condemned-to-33bn-loss-by-Bank-of-England.html

[2] Herald Scotland, 2013, Such a Sorry State of affairs for savers from carney’s Strategy, http://www.heraldscotland.com/business/opinion/such-a-sorry-state-of-affairs-for-savers-from-carneys-strategy.21829161

(Business) Nationwide: Nationwide‘s delay in moving into SME loan market wiser than you think

Nationwide had planned to enter the SME market and start making loans to small businesses across the UK as soon as next year but suddenly decided to delay their entry until two years later than planned.  On first look, this decision is strange as Nationwide already compete with major commercial banks so it would represent a natural transition if they were to starting lending to small business but a considered look at the SME market would make Nationwide’s delay a wise decision.

There are number of reason why Nationwide have decided delay but the most prominent among them would be the insistence of regulators to increase the amount of capital the Building society holds in reserve. One of the key features of the financial crisis of 2007-08 was how undercapitalized high street banks coupled with obscene levels of debt which still effect major banks, including Nationwide, to the present day. Still reeling from the fallout of the last crisis, regulators at the Bank of England are prepared to stand firm and hold fast to their capital demands despite criticism from business and government ministers looking to start another lending bonanza[1]

A second reason why Nationwide may be a little apprehensive about entering the SME banking market is the very nature and structure of the market itself.  The UK SME market is run by five major banks that control 90% of the market so this leaves very little room for Nationwide to work with off the bat[2]. While it may be argued that there may be a need for competition, this brings up another problem why Nationwide are less than gung-ho about entering the SME banking market.

According to EEF, it appears that small business (Nationwide’s prospective customers), despite the relative lack of real competition in the market, as they “were reporting an improvement in the availability of borrowing and a drop in the cost of securing loans”[3]. Another reason why Nationwide delayed their entry into the SME lending market is they have little knowledge about very risky market given that a significant number of SME ‘s fail. To illustrate, would you gung-ho about investing money in something that fails 20% of the time in its first years or 50% in the next three? Nationwide, wisely, clearly aren’t[4]. Building Societies like Nationwide are by design conservative organizations so forays into markets as risky as the SME banking market are not done on a whim[5].

However, Nationwide might have been encourage by data that shows that the rate of business failure has been in decline since the crisis meaning SME have mostly weathered storm coupled with people starting new businesses to replace those who were wiped by the credit crunch. Also with government almost sounding a rallying everybody with an inclination to invest in small business, Nationwide might have been tempted to try their hand.

But even Nationwide to take the plunge into the SME banking market, there is no promise that Nationwide would any more lenient than high street are towards SME’s. With Nationwide being risk averse by nature of their business model, the barriers to funding are likely to be rigid and since they suffer from the same capital shortfalls (though not as large) as other major high street banks, pumping money into SME’s do not look an attractive prospect.

In sum, Nationwide may end up taking the plunge but not without their feet in an ever increasing tide-happy pool.

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[1] P. Cunliffe, 2013, Nationwide delays SME Lending Plans, http://www.express.co.uk/finance/city/425043/Nationwide-delays-SME-lending-plans

[2] Ibid

[3] Ibid

[4]A.Stount, 2012, The UK Start Up Economy: Nov 2012,  
http://www.insidestartups.co.uk/blog/the-uk-startup-economy-in-numbers-nov-2012/

[5] M. Flanagan, 2013, Comment: Mutual recriminations over Nationwide, http://www.scotsman.com/business/management/comment-mutual-recriminations-over-nationwide-1-3063255