The Banks are Back Again!

Few people will remember how the almost largest bank in Finland, OP Bank, was telling its clients in 2010 that not paying off a housing mortgage every month was the smart thing to do. 

They recommended that their customers should start enjoying life by consuming more – by buying new clothes, new cars and investing into the stock market. Finland was coming out of the financial crisis caused by the banking scandals and the corruption in the American real estate market.

In 2010 the response to the economic shock by the European Central Bank was to reduce interest rates to zero and below – a level never really seen before in the West. That allowed people to take on debt with the “feeling” that its was cheap, which it was and still is!

This Finnish bank, and other banks, saw no problem in encouraging more risk-taking by not reducing heavy debt burdens carefully of long periods when interest rates were near to zero. Now 12 years later over 30% to 50% of the debt would have been reduced and money left over for an enjoyable life.

The bank’s advice was irresponsible because debts always have to be repaid and these low interest rates just make it less painful!

Naturally the bank also had its own interests at heart. They simply wanted to have the largest possible volume of loans on their balance sheets because it was then and still is super profitable.

The banks have two ways to make a financial killing:

Firstly, the European Central Bank is lending money to banks at around 1% below the market rate! The Central Bank thinks that throwing cheap money at banks will stimulate the economy more quickly as companies invest in new plant and factories with new “cheap” debt. But banks prefer to lend money to ordinary folks for housing loans because they get to have the clients’ salaries and their homes as security for the loans. Lending to companies is a marginal business for banks since it is more risky! So much for the misguided central bankers who seem to be far too far removed from real life while they sit in their museum-like buildings in the most expensive parts of the city… Just take a look at these buildings above in Helsinki, Frankfurt, London and Madrid… what do they need these palaces for?

Secondly, the banking lobby, one of the biggest lobby groups here in Finland and in most other countries, managed to persuade the then right-wing government to allow banks to legally circumvent giving clients the benefits of these negative interest rates. This meant that the banks pocketed that benefit themselves and charged a margin. Politicians are not hard to persuade to act like this because the banks have many interesting ways to support them at election time with  seminars, food and booze, as well as modest amounts of cash. We do not call these supports “bribes” because that is a nasty word that implies something illegal… 

Now, after 12 years, Covid and War-Criminal-Putin, we still have low interest rates. Central banks are worried about inflation and interest rates have moved a little higher to 1% and 2%. They may go to 4% but in any event these current low rates are at the lowest levels seen during the last 100 years and here is little reason to believe that they will increase to what we saw in the 30 years before the financial crisis.

But, as this headline says – the banks are back! This means that every bank’s housing loan salesman and sales lady are telling customers to buy an interest rate cap to avoid higher interest rates. The price for these caps are really high and will do little to ease the problem of higher rates, if they ever arrive. The best protection is to avoid excessive debt, to repay loans as fast as possible and keep sufficient savings for a rainy day – and never listen to any advise from the bankers. Bankers and their shareholders only care about their KPIs, profits and bonuses…

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