What is the real cost of banking?

Many moons ago someone thought it was a good idea to look after people’s money, charge a fee for this service and offer a high degree of certainty that the deposits would be returned.

This model soon became popular and the inventors started lending deposits to borrowers for a fee, which we now call interest.

The certainty that the depositors wanted was replaced by risk, as the guarantee of getting all their money back became uncertain due to the reliability of the borrowers.

The modern-day bank does a lot more than just this of course, but the underlying reason why they exist is the same – to offer certainty that deposits will be returned. There is no question this has a place in saving, which is why schemes like the Financial Services Compensation Scheme (FSCS) exist. All this is of great reassurance to us and delivers confidence in the banking system - but at what cost?

The cost is not necessarily that we pay a direct fee (although sometimes of course we do). Instead the cost is manifested in another way: low interest rates. Rates for deposits are minimal, partly due to the regulatory burden placed on banks and mandatory insurance schemes (like the FSCS). This is compounded by high inflation. So, money that sits in the bank can be protected at one level, but its value gets eroded by the combination of low interest rates and higher inflation.

Capital preservation is important, but still involves a level of risk taking. The question is: what level of risk to capital is required to achieve the returns needed?

We pride ourselves on making those assessments for our customers and the Downing bond platform’s track record is one that we think speaks for itself – zero defaults.

The opinions expressed are the views of the speaker, are subject to change, and should not be interpreted as advice or a recommendation. 

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