There is an old Latin American central bankers’ saying, which arose at the same time as Brady Bonds and the Latin American debt crisis of the early 1980s, which goes along the lines of: “It’s against my principle to pay interest, and against my interest to pay principal.”
Nowadays, the lack of interest on debt or, more accurately, dead cash balances ‘loaned’ to banks overnight—NII, or Net Interest Income to give it its technical name—has had a huge impact on the profitability or otherwise, of the major custodial banks. The reduction of NII, due in part to better managed balances, but primarily to a reduction in interest rates, has reduced bottom-line profits by as much as 40 percent, meaning savings have had to be found elsewhere—via headcount reductions, minimised IT spend, offshoring or, conversely, geographic retrenchment.
Once rates start to return—at the start of the year, it was felt that it would be another four years or so before we’d see a rise, but as we stand today it looks like a modest rise of 25 or 50 basis points could be seen within 18 months or so—then banks will start to regain the ‘true’ confidence and spending power that was the hallmark of the nineties and noughties. When that happens, we can then expect to see a concerted upward spiral of hiring, with multiple competing offers, buyouts and guarantees returning.
However, everything in life is a trade-off, and the flipside of this windfall for the banks is that for individuals, a rise in interest rates will significantly and negatively affect their general level of wealth, given their overdrafts, loans and tracker mortgages.
Despite what the general population feels about the wealth of ‘bankers’, the truth is that debt is a friend to most people, whatever their income, in that it sticks with them closely. Invariably, the more you earn the more you spend, and a combination of school fees, cars, foreign holidays and mortgage repayments can weigh heavily upon your shoulders. Debt can be a great and useful friend in that it allows you to buy a car, house, holiday home or fund a holiday. On the flipside, it can be a millstone around your neck and an extended period of unemployment can drag you quickly and deeply into the mire.
As Paul Clitheroe, the Australian financial commentator once said (with a quote that applies equally to financial institutions as to individuals): “There are plenty of ways to get ahead. The first is so basic I’m almost embarrassed to say it: spend less than you earn.”
Being an honourary Scot, I can only agree with those parsimonious sentiments.
As ever, do let me know your thoughts. Drop me a line at paul@localhost