Consumers are not reaping the benefits of historically low interest rates as banks look to buffer their capital reserves in light of the financial crisis, says the Bank of England.
Since the financial crisis, interest rates on mortgages have fallen by much less than the Bank's base rate - which has remained at 0.5% since March 2009 - says the Bank in its quarterly bulletin.
Banks are not only failing to pass on the sharp reduction in base rate but actually charging more, with new lending rates to households increasing in some cases. The spread on an unsecured £10,000 personal loan has surged from four percentage points before the financial crisis to around ten percentage points today.
Meanwhile, interest rates on credit cards and new loans have soared.
Placing additional pressure on consumers, banks have also hiked charges such as arrangement fees and penalty fines.
The Bank says part of the reason for the disconnect between base rate and lending rates stems from increased funding costs and higher expected losses on bad loans. But it also says banks are ramping up rates beyond these higher underlying costs in order to buffer their capital reserves.
"A larger residual is consistent with lenders increasing mark-ups over marginal costs for new lending, which may reflect a need to build higher capital levels within the banking sector," says the report.
It adds the relative rise in lending rates compared to base rate could also result from a decline in competition following consolidation in the banking sector at the height of the financial fallout.
Lloyds' purchase of HBOS and Santander's acquisition of Alliance & Leicester and parts of Bradford and Bingley have both served to reduce competition.
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