Those evil banks....

They are not passing on to their customers, or at least to their borrowers, the full recent drop in the Base Rate, or Bank Rate as Governor Mervyn King prefers to call it.

At least they hadn't until the past few days. After the half percent cut in October for weeks there was a small cut only. The rate fall in the average two-year fixed mortgage, the most popular with borrowers, was only by 0.06 percentage points.

The banks explanation is that the rates on the wholesale money market, where the banks raise most of their money, had remained high. As the result of the half point cut the Libor rate fell from 6.31 to 5.78, but this took a few weeks. It could be that last week's cut will take a week or two to show real downward progress.

There seems to be a mixture of reasons for the delay in adjustment:

1) There is still a fear and lack of trust. Some lenders bought financial instruments from other banks only to find out later that sub-prime lending underlay them, and they had to write down massive "bad debt" losses. This, rather than the mortgagees who defaulted in repayments, has made them unsure. There is also a more thorough look at potential borrowers, to try to reduce risk of default in the future.

2) There is a prospect of still further reductions in Bank Rate, to a point where bank margins would be slashed to the point where there was little return to cover risk of default and administration costs. All this if borrowers would be off in search of better conditions elsewhere after two years. This may explain why many banks have withdrawn tracker mortgages and relaunching them at higher margins above Bank Rate. They are also demanding larger deposits by borrowers towards paying the purchase price - gone are the 125% mortgages and even the 100% mortgages. This seems wise.

3) There is probably an attempt to rebuild reserves which have been savagely attacked by the credit crunch.

Mr. Darling threatened them and called in leaders for an uncomfortable meeting. Newspapers and individuals were baying for the evil banks to do the decent thing. Some of the banks which have taken the government's largess will doubtless come under pressure. All, except Northern Rock, however, are commercial organisations not charities or social bodies, much less agents of government. Shareholders (including pension funds) have had a bad time, and tend to be forgotten. The banks owe it to these "savers" to try to restore their position, - to restore margins and protect "owners" interests.

The big advantage of the financial markets is that they are, at least in theory, competitive. This was the reason for liberalisation in the 1980s. When once trust in other banks is re-established, we can expect competition to drive down rates. If demand is short because so many families have been dispossessed, we would expect the banks eventually in their own interests to gain borrowers to cut margins. That clearly is not the case at the moment.