Credit crisis could be an advantage for savers

| September 13, 2007 | 0 Comments

Banks are facing their worst credit crisis for 20 years and this is resulting in savers benefiting from high rates of interest. Banks and building societies are wary of lending to each other so are turning to savers rather than the money markets as a way of accumulating cash.

The interest rate that banks charge to other banks (identified as LIBOR) has increased dramatically. The rate for lending money for 3 months was 6.04% at the beginning of August, it is now 6.9%. The Bank of England interest rate is currently at 5.75% - a gap of 1.15 points. This is usually 0.15 points.

Northern Rock has been affected badly as have other mortgage banks as they rely on the money markets to help finance their businesses. Building societies have coped better because they rely on High Street savers for a greater amount of their money.

Nearly 7% before tax on new bonds with the rate fixed for a year is being offered by banks and building societies. Savers prepared to tie up their money should take advantage of these bonds. However, the turbulence in the money markets won’t last. The US Central bank may cut its base rate at a meeting next week, which may trigger rates in money markets here to drop.

A Professor of Asset Management at London-based Cass University said that banks are collecting as much cash as they can and savers are benefiting. A spokesperson for Fathom, the economic consultants, highlighted that these rates are generous.
Capital Economics remarked that banks on the high street are competing stock up their emergency money. This will continue until the uncertainty between the banks starts to lessen which could take a few weeks.

However, the question being asked is if banks are unwilling to lend to each other, should savers be wary about lending their money? The answer from many analysts is that it is highly unlikely that large retail banks will go under, it is hedge funds that are being affected.

Finally, many analysts forecast that the credit crunch will peak before the end of 2007, so lower rates are expected.

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