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June 09, 2007

Bank Interest Rates

Well, lookee here:

High street banks have cut interest payments on current accounts by a fifth in the past year, even though interest rates are at a six-year high.

The silent squeeze on consumers has earned the banks £750 million, which could have been passed on to current account holders.

Campaigners accused the banks of profiteering, and urged the Government to force them to be more transparent about low rates.

Overdraft interest rates have also been increased much faster than the base rate, according to new research. With studies also showing banks have been increasing their overdraft interest rates much faster than the base rate, they have come under fire for a double pinch on households’ finances.

It comes as the banks face investigation by the Office of Fair Trading for levying unfair charges on customers.

I've bolded the one word there that needs to be changed so that you can make sense of what is going on. Change the "as" to "because" and you'll get it. Providing you with a cheque book, a bank card, all those hole in the wall machines, the staff to answer the telephone and so on costs money. So if they're not getting it in one place, by stiffing you on charges, they'll get it in another, by offering you paltry interest rates.

The less well-off also face higher borrowing costs, according to research, since lenders are raising rates on smaller personal loans while leaving them lower on big loans.

Sure, there are economies of scale to loans. Lending someone £500 requires the same research as lending someone £ 2,000. That has to be paid for and it can either be done via arrangement fees ot varied interest rates: thus, small loans will cost more than large ones.

Why is anyone surprised at either of these?

June 9, 2007 in Business | Permalink


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The lower proportionate cost of the larger loan is not what is properly described as an "economy of scale" (though it is of a type included in that term). Neither is the saving that accrues to one in buying in a volume qualifying for quantity discount.

The term "economy of scale" is more properly seen as a likely advantage of larger vs smaller enterprise or operation and has more to do with topology and design than with any economic law or necessity.

Both the large (size) commercial borrower and the smaller individual will tend to get similar rates for loans of the same magnitude and risk characteristics. But largwer outfits will tend to do many things in a larger way with lesser cost allocated to each transaction but there is no hard and fast rule except that the larger organization will have more interfaces at which proper design will effect such economies. One of the very largest economies of scale for the very large is the total effect-on-fortune minimization of a given screw-up (a mirror-image of the negligible change in growth attributable to any specific success.

Many years ago, quite well-regarded businessmen and business-school intellectuals seemed impressed that such economies were the inevitable and rightful due of bigness itself; a trend toward mergers and "conglomerates" ensued which lasted several years before it became apparent that more than just size was involved. Today, those involved with such activities are far more savvy and have become expert on how entities "fit" together.

Whether having legal counsel in-house or on retainer, producing components internally, buying in (or importing), making deliveries in company vehicles or via commercial services--and hundreds of other choices--all provide opportunities for effecting economies via the correct choices. And the larger the firm, the more such opportunities exist or occur, though without any particular advantage in being able to detect and exploit them.

Tim adds: Believe me Gene, I also believe in diseconomies of scale.

Posted by: gene berman | Jun 9, 2007 7:50:45 PM