Savings rates are the subject of pretty much every discussion I hear or partake in at the moment and I guess that is no surprise when a saver with a base rate tracker product who was earning 5.75% as recently as November 2007 and 5% for the lion’s share of 2008, is now receiving a rather derisory 0.5%. On a £10,000 deposit balance that is the difference between £575 annual interest and just £50.
As a Mutual Building Society our primary job is to protect the safety and security of the cash that our members entrust to us to look after, but secondary to that is also the provision of a return that represents value for money. This is not such an easy task with a base rate to work with of just half a percent.
It is fair to say that we have done nothing more than pass on base rate reductions to our savings products and in some cases have decided not to pass them on in full, thereby improving the relationship of many of our savings rates with base rate; however I have heard enough from members over the last few weeks to suggest that we need to do better in their eyes.
No financial institution can have every one of their products continuously representing the “best buys” in its given category as a strategy such as this would firstly see a flood of new business, followed by an eventual inability to make a profit on the margin between savings and lending, but at our AGM last week members were clear that in some areas we have come off the pace too far (or more likely others have upped their game in the pursuit of new funds) and that, coupled with a few letters that have come across my desk in the last few days have confirmed to me that we need to review things and look to help our members where practical.
There is little point in following unrealistic expectations of a full suite of “best buys” for the reason stated above, my job is primarily to protect member’s capital, not chase transient money with rates to make up shortfalls in balance sheets which one could argue is happening elsewhere. However having conducted a long and robust review today, the executive team here concluded that we need to try harder in 3 core areas: our traditional branch based accounts, our ISA range and our fixed rate bond offerings. We also debated a key theme of finding ways to reward the loyalty of our existing members and as a principle will endeavour to make enhanced products available to those already with us.
Over the next week or so we will increase the rate on our cash build 90 account to make it compete strongly with the best of the traditional high street account. We will also be launching a new fixed rate bond with rate incentives for existing members and we have agreed a new 2 year fixed rate ISA that again will be very competitive and without the small print and tie in of many of the offers from the big banks and we will also have a new online corporate account to help local businesses.
We are also looking to work up some branch and online reward products that will allow instant access, but pay a great rate if no withdrawals are made and finally we debated how as a mutual we should be looking to help those members who are experiencing real hardship as a function of the current economic situation. We will seek council from the likes of Citizens Advice to help us with our thinking in this area.
We can’t please everyone all the time, I am fully aware of that, but I hope those members who have taken the time to offer views will see that where practical Saffron listens and takes action.
Monday, 27 April 2009
Wednesday, 22 April 2009
What a great AGM.
Last night was our Annual General Meeting, which this year we held at the Duxford Imperial War Museum.
I have to admit to being slightly apprehensive as to the mood I would find our membership in, as to be fair the financial services sector has not exactly covered itself in glory in the last 12 months and recently the building society sector too has taken some flack over the Dunfermline issues.
As a breed, CEO’s in the finance industry are clearly not the most popular animal at present, in fact in the popularity poles we had risen to the top in the “disliked stakes” above even journalists and estate agents (no offence to any estate agents or journalists reading this). Therefore I needed in my mind an ice-breaker, so began my presentation with a statement of fact that Saffron made £24,001,115,000 more profit in 2008 that the Royal Bank of Scotland; not a statement that I ever expected to be able to make, but a fact none the less. I then provided an overview of the current UK economic climate and a review of our results for 2008, which seemed to be well received by the members.
Richard Herbert our Chairman then led us through the formal AGM, before handing back to me to finish with some insights into the results of our recent members survey and our plans to develop new product offerings to help loyal members in the current extremely low interest rate environment, followed by a robust Q&A session.
It is fair to say that members wanted reassurance about the longevity of the society and our ability to survive the recessionary storms, which we were confidently able to provide; and there was some robust questioning to the Chairman on executive pay packages, with assurance needed that these packages were designed to promote long term sustainability, not simply short term profit maximisation, which Richard Hebert happily shared.
After the formal meeting though, it was really nice for me and the Board to have time to chat to members about there views on the society and wider economy. I always find myself extremely proud to run a mutual with members who take an active interest in their society and for me the insight and feedback they provide really does help to shape what we do next.
One key theme that came through was a desire from members to receive personal notification when we change or launch a new product and whilst not cost effective to write to every one, I committed that we would create a register of email addresses and send an email to all those wanting to know about new initiatives as and when they happen. Anyone who would like to receive such updates, please simply send an email saying “please keep me up to date” to our marketing team marketing@saffronbs.co.uk and they will happily add you to the list.
I also enjoy an increasingly growing personal relationship with some of our members; I was surprised how many of the 70 plus attendees I knew by name or had spoken to or exchanged correspondence with over the last few years. For me this is what it’s all about; fulfilling my role of taking care of our members' money.
Finally it was Richard Herbert’s last AGM as he retired as Chairman last night, but it has been a pleasure working with Richard and he will certainly be missed in the boardroom. Peter Harrison, our current Vice Chair will take over as the successor at a Board meeting later this week, and will no doubt continue the diligent and prudent steerage of the board that Richard has provided over the last 6 years.
I have to admit to being slightly apprehensive as to the mood I would find our membership in, as to be fair the financial services sector has not exactly covered itself in glory in the last 12 months and recently the building society sector too has taken some flack over the Dunfermline issues.
As a breed, CEO’s in the finance industry are clearly not the most popular animal at present, in fact in the popularity poles we had risen to the top in the “disliked stakes” above even journalists and estate agents (no offence to any estate agents or journalists reading this). Therefore I needed in my mind an ice-breaker, so began my presentation with a statement of fact that Saffron made £24,001,115,000 more profit in 2008 that the Royal Bank of Scotland; not a statement that I ever expected to be able to make, but a fact none the less. I then provided an overview of the current UK economic climate and a review of our results for 2008, which seemed to be well received by the members.
Richard Herbert our Chairman then led us through the formal AGM, before handing back to me to finish with some insights into the results of our recent members survey and our plans to develop new product offerings to help loyal members in the current extremely low interest rate environment, followed by a robust Q&A session.
It is fair to say that members wanted reassurance about the longevity of the society and our ability to survive the recessionary storms, which we were confidently able to provide; and there was some robust questioning to the Chairman on executive pay packages, with assurance needed that these packages were designed to promote long term sustainability, not simply short term profit maximisation, which Richard Hebert happily shared.
After the formal meeting though, it was really nice for me and the Board to have time to chat to members about there views on the society and wider economy. I always find myself extremely proud to run a mutual with members who take an active interest in their society and for me the insight and feedback they provide really does help to shape what we do next.
One key theme that came through was a desire from members to receive personal notification when we change or launch a new product and whilst not cost effective to write to every one, I committed that we would create a register of email addresses and send an email to all those wanting to know about new initiatives as and when they happen. Anyone who would like to receive such updates, please simply send an email saying “please keep me up to date” to our marketing team marketing@saffronbs.co.uk and they will happily add you to the list.
I also enjoy an increasingly growing personal relationship with some of our members; I was surprised how many of the 70 plus attendees I knew by name or had spoken to or exchanged correspondence with over the last few years. For me this is what it’s all about; fulfilling my role of taking care of our members' money.
Finally it was Richard Herbert’s last AGM as he retired as Chairman last night, but it has been a pleasure working with Richard and he will certainly be missed in the boardroom. Peter Harrison, our current Vice Chair will take over as the successor at a Board meeting later this week, and will no doubt continue the diligent and prudent steerage of the board that Richard has provided over the last 6 years.
Wednesday, 8 April 2009
How to make £100 into £1,000...
Quantitative easing (QE) is a subject that has been must discussed but also much misunderstood in the media and believe it or not lots of people have actually asked me to explain exactly what it is, why the Bank of England is doing it and how will it help!
So here goes….
QE is basically the creation of money out of thin air. In the UK only the Bank of England has the authority to “make” money, but the government could give itself the right to and in fact it did so in world war one. It can take the form of actually printing notes, but notes are only a small part of the money supply so QE involves the Bank creating electronic money.
You may think that the Bank of England controls the money supply but this isn’t really true. In fact the banking system creates money through a process called the “money multiplier”. It works like this: if you deposit £100 in a bank account, the bank then has £100 to lend. When it lends, the £100 will deposited in the borrower’s or someone else’s bank account, giving that bank £100 it can lend and so on and so on.
The only break in this money roundabout is the bank’s need to maintain cash, because at any given time their depositors may want their money back. Most countries have regulation to maintain a minimum cash reserve and in the UK it is governed by the FSA’s liquidity requirements. In the US the limit is 10%, which means a £100 deposit can become a £90 loan, this £90 deposit then can become an £81 loan etc. etc.
Therefore in a strong economic climate electronic money is effectively created in bucket loads through normal bank lending activity, but as at today, lending has been reduced and banks, businesses and individuals are looking to pay down debts; which in turn has the effect of shrinking money supply.
QE is therefore all about increasing the level of money (bank deposits) in the economy and whilst not directly designed to increase lending, higher levels of deposits give banks the opportunity to lend more. There are a number of ways to implement QE, but the simplest and chosen route of the BOE is to buy assets from the non-bank private sector with cash it has “made”, such as gilts and some commercial bonds. This increases bank deposits and will stimulate lending if the bank chooses to lend the money.
The primary objective of QE is counter the recession, but to boost the economy it needs to increase spending on goods and services. For this to happen, the additional bank deposits need to provide additional comfort for the banks and in turn increase their lending activity and ease pressure on the inter-bank funding markets. However there are risks, if the banks don’t lend or demand to borrow does not materialise, and people’s primary focus remains to reduce debt, it will be some time before spending increases and therefore boost the overall economy. On the flip side, the additional money supply could over-stimulate spending and drive inflation upwards.
I have no doubt that the BOE will use it wisely, and if needed, reverse it once it has done its’ job and I personally think the risks of upwardly inflation spiralling out of control are minimal. But for the sake of jobs, savers and so much industry that revolves around the principle asset of the home in this country, I hope it has the desired effect.
So here goes….
QE is basically the creation of money out of thin air. In the UK only the Bank of England has the authority to “make” money, but the government could give itself the right to and in fact it did so in world war one. It can take the form of actually printing notes, but notes are only a small part of the money supply so QE involves the Bank creating electronic money.
You may think that the Bank of England controls the money supply but this isn’t really true. In fact the banking system creates money through a process called the “money multiplier”. It works like this: if you deposit £100 in a bank account, the bank then has £100 to lend. When it lends, the £100 will deposited in the borrower’s or someone else’s bank account, giving that bank £100 it can lend and so on and so on.
The only break in this money roundabout is the bank’s need to maintain cash, because at any given time their depositors may want their money back. Most countries have regulation to maintain a minimum cash reserve and in the UK it is governed by the FSA’s liquidity requirements. In the US the limit is 10%, which means a £100 deposit can become a £90 loan, this £90 deposit then can become an £81 loan etc. etc.
Therefore in a strong economic climate electronic money is effectively created in bucket loads through normal bank lending activity, but as at today, lending has been reduced and banks, businesses and individuals are looking to pay down debts; which in turn has the effect of shrinking money supply.
QE is therefore all about increasing the level of money (bank deposits) in the economy and whilst not directly designed to increase lending, higher levels of deposits give banks the opportunity to lend more. There are a number of ways to implement QE, but the simplest and chosen route of the BOE is to buy assets from the non-bank private sector with cash it has “made”, such as gilts and some commercial bonds. This increases bank deposits and will stimulate lending if the bank chooses to lend the money.
The primary objective of QE is counter the recession, but to boost the economy it needs to increase spending on goods and services. For this to happen, the additional bank deposits need to provide additional comfort for the banks and in turn increase their lending activity and ease pressure on the inter-bank funding markets. However there are risks, if the banks don’t lend or demand to borrow does not materialise, and people’s primary focus remains to reduce debt, it will be some time before spending increases and therefore boost the overall economy. On the flip side, the additional money supply could over-stimulate spending and drive inflation upwards.
I have no doubt that the BOE will use it wisely, and if needed, reverse it once it has done its’ job and I personally think the risks of upwardly inflation spiralling out of control are minimal. But for the sake of jobs, savers and so much industry that revolves around the principle asset of the home in this country, I hope it has the desired effect.
Thursday, 2 April 2009
What the Government give, the Bank of England take away!
Depending on how you read it, pensioners are about to get a boost to their income with the UK state pension increasing on the 06 April by £7.25 per week for couples and £4.55 per week for single pensioners. This is the biggest increase in both percentage and cash terms since 2001, when the basic state pension was increased by £5 a week following criticism of the previous year’s measly increase of 75p.
I have no doubt that the increase will be welcomed by the majority of pensioners, many of whom are estimated to be struggling with personal inflation levels of 9.2% for a single male pensioner, 9.1% for a single female pensioner and 7.7% for retired couples. However in real terms they will not have extra cash to spend.
The average pensioner has around £10,000 in savings, upon which they rely on interest to supplement income. Even if we keep the maths simple and compare 5% base rate to the current 0.5% base rate, those savers have seen their income reduce from £9.60 per week to just 96 pence. So in real terms the increase in pension does not even get back to square one.
Let us hope that today’s report by Nationwide of house price increases of 0.9% in March signal some hope of recovery for the wider economy. That way we can get back to fair interest rates for borrowers and savers alike.
More stability of house prices will bring back lender and consumer confidence and may allow more pensioners to take advantage of equity release mortgages to enhance their standard of living.
I have no doubt that the increase will be welcomed by the majority of pensioners, many of whom are estimated to be struggling with personal inflation levels of 9.2% for a single male pensioner, 9.1% for a single female pensioner and 7.7% for retired couples. However in real terms they will not have extra cash to spend.
The average pensioner has around £10,000 in savings, upon which they rely on interest to supplement income. Even if we keep the maths simple and compare 5% base rate to the current 0.5% base rate, those savers have seen their income reduce from £9.60 per week to just 96 pence. So in real terms the increase in pension does not even get back to square one.
Let us hope that today’s report by Nationwide of house price increases of 0.9% in March signal some hope of recovery for the wider economy. That way we can get back to fair interest rates for borrowers and savers alike.
More stability of house prices will bring back lender and consumer confidence and may allow more pensioners to take advantage of equity release mortgages to enhance their standard of living.
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