Large but not high

The Office for Fair Trading (OFT) has taken another potshot at the UK's banks today, saying that their current account fees are not serving customers well. Here's a sample of the coverage.

As a former banker, I'm well used to hearing complaints about how much money banks make, or how they make it. It's not clear to me how whether there's any form of bank profit-making that many members of the public or the media (or even some of the regulators) would find acceptable. By and large, banks make money either from fees (such as current account charges) or from the so-called "spread" between their funding costs and their lending rates. Both of these regularly come under malevolent and ill-informed scrutiny.

In the case of the present debate on current account fees, I should 'fess up and say that I have one of those premium-type accounts that allows me to pay no fees as long as I keep a certain balance in my account. It does seem unfair on the surface that people with less money than me are paying larger fees, but the reason the bank gives me this deal is that it makes plenty of money by holding on to my cash and lending it on at a spread. I may not be paying the fees that the OFT is so upset about, but I have no doubt that my bank is making more money out of me than it does out of its worse-off cliemts. You'd think the OFT might think about this before it issues its fatwa.

A subset of this supposed case against fees, one raised yet again by the OFT today, is the perceived unfairness of high charges for unauthorised overdrafts. I have no sympathy at all with this, given how easy it is to get a pre-authorised overdraft limit -- and it's also free. If you don't do this, it's hardly your bank's fault. Sure, these charges may be a tax on stupidity, but so is the National Lottery, and I haven't heard the OFT slagging that off recently.

As for the "spread", the money advice columns in the newspapers are constantly carping about the gap between deposit rates and mortgage rates. The truth is, however, that much of the banks' funding takes place it the wholesale markets, at much higher rates than those posted in your High Street branch. It's these rates that largely determine how much gets charged for loans, especially in periods like the one we've just gone through, where growth in mortgage lending far exceeded the deposit-gathering capabilities of the banks' branch networks. The latest data I saw on this suggested that the spread between wholesale deposits and mortgage rates is well below 100 basis points. Bizarrely, the newspaper that reported this called it a "handsome return": it's nothing of the sort, especially in a world of rising credit risks and defaults.

The media love to report the aggregate earnings of the banks because the numbers are impressively (or if you're so inclined, infuriatingly) huge. Today's OFT report talks of £8 billion in fee revenue for the entire banking system, with £2.6 billion coming from overdraft charges. The former President of the bank I used to work for in Canada responded to a similar round of criticism by arguing that these numbers are "large, but not high". Banking is by nature a high volume, low margin business. It would be nice to think that the OFT (and its cheerleaders in the media) knew that.

One final thought: if you don't like profitable banks, how do you feel about unprofitable ones? Did you enjoy the Northern Rock crisis? Its clients are having trouble remortgaging not because the bank was too profitable, but because it wasn't profitable enough to survive in tough times.