Why Can Banks Get Away With It?

I just checked the data from PS Bank's website. As of December 26, 2011, 7:01 PM, the savings deposit rate (what a regular person will earn on a savings account in a year) is 0.5 percent. So if I deposit 1000 pesos in the bank today, I will have 1005 pesos in the bank a year from now.

Meanwhile, the bank's auto loan rate (what the bank will earn from a borrower in one year) is 6.5 percent. That is 13 times the savings deposit rate. That means that if a person borrowed 1000 pesos from the bank, that person will have to pay the bank 1065 pesos at the end of the year. That's a net income of 60 pesos for the bank, for every 1000 peso transaction between a borrower and a lender.

The bank's profit for a housing loan is even higher, since the bank's housing loan rate (what the bank will earn from a borrower in one year) is 8.5 percent. That is 17 times the savings deposit rate. That means that if a person borrowed 1000 pesos from the bank, that person will have to pay the bank 1085 pesos at the end of the year. That's a net income of 80 pesos for the bank, for every 1000 peso transaction between a borrower and a lender.

Why can banks get away with it? Shouldn't the depositors be well compensated by the bank? Without depositors, banks wouldn't have any money to lend. Shouldn't the central bank be placing a cap on the minimum amount of interest savings deposits should earn. 0.5 percent interest is way too low. A single ATM transaction's charges and fees wipes away any interest earned for an entire year since ATM transactions are pegged at around 10 pesos per transaction.

Depositors should become wiser, and look for alternative ways they can invest their money in, aside from banks (is a thought that might have crossed your mind by now). And while that is true, other investments are seen as riskier compared to a bank deposit. So the fear of losing the principal amount is what drives depositors through bank doors. And that in my opinion is why banks can get away with outrageous discrepancies between borrowing and lending rates.

But there are also many other reasons why people continue to use banking services. Employers force their workforce to bank with their preferred partner instead of paying the employee outright under the guise of convenience. But this creates earning opportunities for banks through inter-bank transactions. I sometimes think that there is a conspiracy or unwritten agreements between banks during pay-day. The ATM of the bank you're supposed to withdraw your money from always seems to be off-line during payday. This forces the regular Joe to withdraw his money from a competing bank's ATM, incurring inter-bank transactions, and wiping any potential savings on his salary.

Zero sum game theory might also be at work. Instead of people banding together and pulling out all their deposits from banks, forcing banks to increase interest rates to entice more depositors, people will place their money in the bank as long as it earns an interest (no matter how small) since they will be better off than the people who refrain from using the services of the bank and who's money doesn't grow at all. By not working as a group, lenders are out-witted by banks.

And government policy is also an issue. If the heads at central bank are in the pockets of bankers, then they can continue to peg interest rates at ridiculously low levels, justifying that increasing rates will slow down the recovering economy. But the only benefactors from low interest rates are banks. And banks will continue to invest the money they have in risky ventures knowing that they can be bailed out but the government in case they make a mess.

Banks like to crow about increased earnings despite tough economic times. But these earnings again are a result of the outrageous discrepancy between the borrowing and lending rates. And if this continues in the future, people might someday wake up and realize that the banking system is obsolete, and will place their money elsewhere or create an entirely new system for financial transactions. But by that time, the current banking heads will have made their fortune and retire comfortably. Institutional change is a slow process, and will only benefit those in power. Perhaps I should aspire to be a banker.

Here are some Bible verses to think about related to the topic of lending.

Psalm 15:5
Who does not put out his money at interest and does not take a bribe against the innocent. He who does these things shall never be moved.

Exodus 22:25
If you lend money to any of my people with you who is poor, you shall not be like a moneylender to him, and you shall not exact interest from him.

Deuteronomy 23:19 
You shall not charge interest on loans to your brother, interest on money, interest on food, interest on anything that is lent for interest.