How bank charges have affected the financial system

How bank charges have affected the financial system

Bank charges have made an indelible mark on the financial system during the last two decades. These charges include fees levied on a monthly basis for account provision, charges for transactions and overdrafts, and exceeding monetary limits, in addition to interest rates on loans and mortgages. This area of finance is complex and ever changing, but there is an ongoing correlation between the state of bank charges and the prospects of the wider economy.

The impact of rising interest rates

The US Federal Reserve decided in June 2017 to raise interest rates for the third consecutive quarter in order to keep inflation in check. It set aside concerns about how rate hikes could influence rates of consumer spending but the decision will continue to affect the financial system in a number of different ways. Credit card rates, for example, will increase, so it costs more for people to borrow money, which results in the general public actually taking out fewer loans and purchasing fewer assets, such as homes and products. This in turn slows down the economy as consumer confidence decreases.

“What the Federal Reserve does normally affects short-term interest rates, so that affects the rates that people pay on credit cards,” PNC Financial’s Faucher says. The variable interest rates for credit cards are tied to the prime rate, which is generally a few percentage points above the rate for general funds. So, when there is an uptick in the federal fund rate, there is also an uptick in the prime rate and then credit card rates.

Negative interest rates

The Federal Reserve’s interest rate does not affect Americans directly or immediately, but it does filter its way through the economy in the long term, so potential homeowners, for example, will have to select more expensive mortgages when it rises, which then increases the profitability on loans for banks. However, since the global recession, a new trend has emerged where banks use negative interest rates, a forceful monetary measure to combat low levels of investment and low growth. The central bank of Denmark was the first do so in 2012, and several countries in the Eurozone and Asia have followed suit. Reducing bank charges allows banks to loan more money to consumers and businesses, which may lead them to save less and spend more.

PPI controversy

There is no more damning case study for the obfuscation of bank charges and the impact on consumers and the financial system than the payment protection insurance (PPI) scandal. Major financial institutions in the UK aggressively mis-sold inefficient and ineffective bank loans, mortgages and credit cards for more than a decade. The scale of the scandal was uncovered when Lloyds Banking Group decided to set aside a staggering £18.1 billion to compensate those who had been affected. The other banks implicated make up a further £22 billion.

Premiums and claims

Consumers who fell foul of PPI during the 1990s and 2000s often had to pay premiums that added 20 percent to loan costs, though this figure increased to 50 percent in some of the worst cases. These charges sometimes came in the form of a “single premium”, which was added at the start of the loan for mortgage buyers. This practice was banned entirely in 2009.

It is now believed that as many as 45 million policies could have been mis-sold. The Financial Conduct Authority revealed earlier this year that there have been 13 million genuine PPC complaints thus far, with more than 12 million customers receiving payouts before November 2015. The FCA has now set a new deadline of August 2019, so any consumers affected have just under two years to file a Barclays PPI Claim.

Transparency post financial crisis

While the PPI premiums typified the financial sector’s desire to chase profits at the expense of the customer, the public controversy and the 2008 financial crisis has driven a new wave of transparency. In the UK for example, the Financial Services Act (FSA) ensures consumer interests are always looked after, while individual banks are supervised. This resulted in a new regime for PPI, so it could not be sold until seven days after a loan is agreed, any charges are required to be outlined in writing, and it is only included as an optional extra.

Banks are now under more scrutiny, so accountability and transparency is vital. Ms McConnell, Financial Transparency Coalition Director concludes: “We can’t keep relying on the next Lux Leaks or Swiss Leaks to reveal the billions hidden away in the shadow banking system. Banks should be required to disclose information to authorities and the public on a regular basis.”