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Are they sly or just slow about doing the rate thing?

THE BANKS and building societies have taken a kicking this last week. They stand accused of wilfully failing to pass on to you, the consumer, the full benefit of the whole series of interest rate falls that cumulated in Tuesday's cut to 6 per cent.

The charge from newspapers and consumer groups is straightforward: banks, building societies and retailers have all failed to reduce the rates they charge on mortgages, overdrafts, credit cards and storecards by anywhere near as much as the nine-point fall in base rates since late 1990, and have consistently delayed introducing those reductions they have made to several weeks after each base rate cut.

Rates of interest paid to savers, by contrast, have often borne the full brunt of the cuts. As if to stress the point, Barclays, Lloyds and Midland announced on Friday that interest rates on most savings accounts would be cut by 1 percentage point, despite the fact that mortgage rates are coming down by only half a point in the wake of last week's base rate cut.

This has laid banks and building societies open to the charge that, in pursuit of increased profits, they are failing to play their part in reviving the economy.

But do they deserve the opprobrium heaped on them?

The Consumers' Association accepts that mortgage lenders have a responsibility to savers too, whose incomes have been falling dramatically with the tumbling interest rates, but accuses them of being quick to announce cuts but slow to feed them through to existing borrowers. Graeme Jacobs of the CA said that, for example, the lenders could easily overcome the undoubted administrative problems associated with changing mortgage rates quickly by backdating interest cuts.

He was also quick to attack credit card rates, which he said did not follow base rates down fast enough; Mr Jacobs described the argument that credit card issuers faced high administrative costs as 'overstated'. Storecards, he said, were even worse than credit cards: 'Their rates are a rip-off, and we would advise people not to borrow on them.'

Financial institutions do not deny that their profit margins widen when base rates fall, but they say that margins are squeezed in a period of rising base rates.

Mortgage lenders are hurt when they are accused of dashing to put up rates, and say that both falls and rises in mortgage, credit card and other rates always lag behind base rates. They point out that for about nine months, from mid-1989 to spring 1990, mortgage rates were less than base rates. The Halifax, Britain's largest mortgage lender, was lending at 13.5 per cent when base rates were 14 per cent, and 14.5 per cent when base rates rose to 15 per cent. It finally put up mortgage rates to a peak 15.4 per cent in March 1990.

David Gilchrist, a general manager of the Halifax, said it was essential now to protect big savers, who have seen their savings rates plummet. Some 20 per cent of big savers provide 80 per cent of mortgages. The net interest margin - the difference between borrowing and savings rates - needed to be kept at a miminum 1.5 per cent to cover the society's overheads.

Banks defend their overdraft rates by pointing out that the risks associated with such lending have magnified in the recession. 'There is more to providing an overdraft than buying and selling money. The assessment of risk and regulation of the account are crucial,' a spokesperson for Lloyds Bank said.

The credit card companies' defence hinges on the fact that up to 50 per cent of the cost of running credit cards is eaten up by fixed or rising administrative and processing overheads which are not linked to base rates. Fraud prevention costs have also risen dramatically in recent years. Elizabeth Phillips of the Credit Card Research Group, whose members include the 14 largest British issuers, said that the lag was necessary to ensure the more volatile base rates would stick.

Storecards similarly change their rates far less often than base rate changes. Elizabeth Stanton, of the Retail Credit Group, pointed out that because an average of only pounds 170 was owed on storecards, base rate changes were less significant to retailers.

Besides, cardholders do have a choice. They can opt not to pay interest if they settle their accounts in full each month. Some 50 per cent of them do just that.

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