Banks raking in £30bn from interest rate ruse

Britain’s biggest banks are making tens of billions of pounds of profits at the expense of their customers – and the taxpayer.

Lloyds, NatWest and Barclays made £30 billion between them last year by exploiting the gap between the rates for savers and borrowers, City experts say.

The trio are due to confirm the size of their ‘net interest income’ bonanza when they announce their results in the coming days.

Lenders also make easy money on the cash they keep at the Bank of England. Up to £40 billion a year of interest has been paid on this, in what critics say amounts to a subsidy, as taxpayers ultimately are liable for the Bank’s costs.

As interest rates rose from rock-bottom levels, High Street banks profited. They put up mortgage and loan costs faster than they have increased rates for savers and pocketed the difference.

As a result, UK banks have had a remarkable stock market run, beating even the Magnificent Seven of US tech stocks.

The FTSE 350 banking index has delivered a return, including dividends, of 54 per cent in sterling terms in the past year. That is a fraction better than US tech.

The sum banks make from net interest income was expected to fall as interest rates dropped back. The Bank of England on Thursday cut the base rate for the third time in six months, taking the benchmark to 4.5 per cent.

But despite these reductions, lenders are still making money hand over fist. A typical two-year, fixed-rate mortgage costs 5.5 per cent in interest, while an instant access savings account pays just 2.9 per cent, according to financial experts Moneyfacts.

And the difference between the two is higher – rather than lower – than it was a year ago.

Lloyds, NatWest, Barclays and Santander (led by Ana Botin, pictured) which last week reported a 14 per cent rise in profits for 2024, received interest on these reserves totalling £9 billion in 2023.

This was more than double the previous year, according to MPs investigating the practice, and is a quarter of their net interest income. These reserves – totalling £650 billion – came about as a result of the Bank’s Quantitative Easing programme. Under QE, money was conjured out of thin air to shore up the financial system following the 2008 credit crisis. The idea was to flood the system with cash to keep interest rates low, encourage banks to lend and business to invest in order to boost growth.

The banks earned virtually nothing on their reserves when interest rates hit rock bottom.

But that changed when the base rate soared to 5.25 per cent and QE was slowly unwound.

Politicians from across the divide, including Reform UK leader Nigel Farage and former Prime Minister Gordon Brown, have called for banks to be taxed on these interest payments to improve the public finances.

Chancellor Rachel Reeves has resisted the move, saying it could hamper how interest rates feed into the real economy. The policy would also risk a clash with Bank of England Governor Andrew Bailey, who has made his opposition clear.

NatWest and Barclays will report slightly higher net interest income this week of £11.2 billion and £6.6 billion respectively, according to City analysts.

Lloyds’ net interest income is predicted to fall by £1 billion to £12.8 billion, which is still high by historical standards.

Profits will also be hit after Lloyds set aside £450 million to cover potential payouts by its Black Horse unit following a recent High Court ruling on car finance commissions.

This could open the floodgates to a wave of mis-selling claims if the Supreme Court upholds the judgment next month.