While we have all seen the headlines about debt problems in the UK, falling house prices, etc, you would have thought that the banks would be struggling to make money.  Think again!

The only real way in which banks can lose money, from their traditional banking operations, is by writing off bad debts.  You may find this a little curious because surely as interest rates fall, their profit from each loan, each mortgage  and other instruments will fall – not always.

If you watch the interest rate which banks pay savers and charge borrowers, you may start to see a difference as interest rates fall.  The popular trick is to reduce savings rates by more than they reduce debt rates, thereby increasing the difference between what they can charge for loans, etc and what they will pay savers.  This then leaves the banks to use savers money to sell more competitive loans, when in reality it is the savers who are paying for this added competitive edge – an edge which sees their “turn” on savers money increase.

Can you imagine how much money the banks used to earn from current account holders, before they started paying interest on current account balances – this was money for nothing, and the banks were sorry to see this go!

So next time you wonder how the banks make their money in a falling market, you might remember the little tricks they like to play – at the expense of their savers!