The interest rate gap is only increasing.
October 10, 2019
The interest rate gap is the difference between what the banks are allowed to lend money to for interest and what they later lend to private individuals and companies for interest. The fact that the banks must have a certain commission on the loans that they allow their customers to take out is obvious as all companies need to receive revenue, but criticism is often made against the fact that this interest gap is too large. If, for example, the Vickybank lowers the interest rate, given that this should stimulate the economy, the idea is that the banks should reduce equally. Should the banks lend at the same interest rate as before or not reduce to the same extent as the Vickybank, they increase their interest rate gap and thereby make more money. However, the reduction achieved by the Vickybank does not have the desired effect.
Those who examine the figures over the past ten years also see that the real increase between 2002-2012 is 255%, which speaks their clear language. At the end of December 2002, the floating rate was around 5% and the banks earned USD 1,800 on each mortgage loan of one million. Five years later, in fact, this gap was down to zero, but since the beginning of 2009 has gone up sharply.
In December last year, this reached its peak and it was then the highest interest rate gap that Sweden has had in over ten years. The gap was 0.64 per cent, which generated a profit of USD 6400 per million loaned. Although the gap has narrowed somewhat since then, it is still at unusually high levels.
But banks can also lose money…
But there have also been periods when the interest rate gap has been in a negative position, which means that the banks have lost on lending. This happened, for example, during the worst part of the financial crisis during parts of 2007 throughout 2008 and early 2009. At that time, the banks lost up to USD 2000 per year on a mortgage loan of USD 1 million. But since then, the gap has quickly and effectively widened. Since the banks went minus USD 2000 on each million loans in 2008, they now earn around USD 6,000.
The solution is competition
Is it possible, as a consumer, to influence this interest rate gap? The solution is only that competition stiffens. According to her, it is largely an oligopoly in the banking industry, which means that interest rates can be kept up. Oligopoly is the same as monopoly but with the difference that there are more players than just one. But when these do not create any fierce competition between them, no one will have to lower the price (in this case the interest rate).
What a consumer can do is to constantly put the banks against each other and also dare to turn to new players in the market. There are several new lending institutions that are struggling to gain market share and that as a consumer you should be quick to utilize. If everyone were to compare their loan terms more closely, competition would increase, which in turn would create a pressure on the institutions to lower interest rates and thus reduce the interest rate gap.