The end of free UK current accounts?

The end of free checking gathers pace.

On 24 May, Bank of England executive director for banking supervision Andrew Bailey said that the "myth" of free banking enjoyed by customers when not overdrawn made it hard to link costs to products and services received.  UK current account customers will not warm to his argument or its likely implications but the High Street banks will welcome the argument to end free checking if-in-credit.

It is a trend already being endured by customers in Ireland. If you think that the banking crisis was bad in the UK, spare a thought for customers across the Irish Sea. Following a sector wide crisis in 2008 – the cost to the Irish taxpayer so far is about €70bn, give or take - six Irish owned banks have become two so called ‘pillar banks’. The big two (pillar) banks left standing – Bank of Ireland and Allied Irish Banks - are now rewarding taxpayers for their support by ramping up fees for everyday banking for a sizeable proportion of the country.

Bank of Ireland kicked things off by raising fees affecting almost one-half of its 1m customers in March. AIB has come out in sympathy and will follow suit with the end of universal free checking from 28 May. Only Royal Bank of Scotland-owned Irish subsidiary, Ulster Bank, now offers universal free current accounts. It does not however rule out following Bank of Ireland and AIB.

Ulster Bank spokesperson Debbie McCaughey said:

"I can confirm that Ulster Bank does not charge a monthly fee on standard current accounts. As with all our products and services, we keep our current account offering under continual review."

So we now have the irony of the UK government bailed-out RBS Irish subsidiary standing to win over account switchers from the two Irish government-backed lenders, Bank of Ireland and AIB. There is one further irony. Bank of Ireland has not (at least not yet) ended universal free if in credit current accounts for its customers based in Northern Ireland.

In fairness to Bank of Ireland, a lot of its customers can get around the monthly current account charges. If, for example, they deposit at least €3,000 into their current account and make nine debit payments from that account using the telephone or online banking over a three month charging period, they will avoid charges. Students and customers aged over 60 are also exempt. In addition, customers who maintain a permanent credit balance of at least €3,000 (a relatively small percentage of clients) qualify for free banking. Customers not qualifying for free banking will pay €0.28 per transaction or a flat fee of €11.40 per quarter for up to 90 transactions with excess transactions charged at €0.28 each.

AIB’s fees strategy is worse – much worse. AIB spokesperson Helen Leonard told me that the fees change “is driven by the need to enhance cost recovery across all AIB businesses, including the provision of money transmission services, the cost of which is significant.” So from 28th May AIB will seek to recover some of the losses it incurred following the crash by imposing current fees for customers who do not maintain a minimum daily credit balance of €2,500 for the full fee quarter on a personal current account.That will take in 60 per cent of its current account customer base. The 40 per cent of exempt customers will, in the main, be the other exempt customer categories: students, recent graduates and clients aged over 60. The 60 per cent of AIB customers affected will be charged €0.20 per debit card transaction while writing a cheque or withdrawing cash at an AIB branch will cost €0.30 per transaction.

In a statement, Bernard Byrne, director of personal and business banking at AIB, said:

"Free banking offerings across the industry have changed significantly in recent times. While this was a difficult decision to make, nonetheless it is a necessary one if we are to continue to create the conditions in which we can become a strong and viable entity again."

The fees bombshell for Irish bank customers follows an incessant stream of bad news in the local banking sector. Around 6,000 banking staff in Ireland have left the industry in the past three years. Thousands more are set to follow with AIB looking to shed another 2,500 jobs; Bank of Ireland will let up to another 1,000 staff go under a voluntary redundancy scheme agreed with trades union The Irish Bank Officials Association.

Ulster Bank is also bloodletting and will lay off 950 staff in the short to medium term.UK High Street lenders will be watching intently to see if Bank of Ireland and AIB can make the current account fees stick.With such limited competition on the Irish Main Street, there is every chance that Irish customers –or at least those who do not switch to Ulster Bank - will just grin and bear it.

In the UK, there are already 10m chargeable current accounts, with customers paying an average of £185 in fees per year.That is already worth big bucks to UK banks: about £1.8bn in fees last year across the sector.But such accounts are termed packaged accounts (or added value accounts, as banks prefer to call them) and typically offer a bundled range of incentives such as mobile phone insurance and car insurance, other preferential financial services including overdraft, personal loan or mortgage, as well as non-financial products and services.

There were approximately 54m active current accounts in the UK in 2011 and packaged current accounts made up about 17 per cent of the UK retail banking market. The number of charged for current accounts on offer in the UK (69) has more than doubled from the 33 on the market just five years ago and since late 2009 has exceed the number of free in-credit current accounts on the market. Thus far, no UK bank has gone for broke and made the decision to start charging for all current accounts for fear of losing market share. With encouraging noises off from Andrew Bailey – and a bank sector enthusiastic about finding new ways to charge for services currently not charged for - that day may not be far off.

Douglas Blakey is the editor of Retail Banker International.

Bank of Ireland: Photograph: Getty Images

Douglas Blakey is the editor of Retail Banker International

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?