Could negative rates signal the end of free banking?

HSBC hints it will soon look at charging for current accounts

Claer Barrett

© NurPhoto/Getty

Everybody knows there’s no such thing as a free lunch. But is there any such thing as a free bank account?

Current account customers in the UK could be about to find out. This week, HSBC admitted it would have to look at charging for basic banking services in some markets, because it was losing money on large numbers of accounts.

Such a move would be likely to produce wails of outrage from customers of British banks. Unlike those in the US and Europe, they have not suffered the indignity of being charged for banking services since the 1980s, unless they dip into the red.

Instead, the UK has carved out its own peculiar niche — the “free in-credit banking model”. So long as your account is in the black, you won’t be charged a penny for online banking, making payments and transfers, using the UK’s network of free cash machines or having a cheque book (retro).

Yet even before HSBC’s admission, there were plenty of people, from the governor of the Bank of England down, who claim the UK’s “free” banking model is as anachronistic as paying by cheque in a shop.

Banking, like any other service, costs money to provide. Say that banking is free and you are merely shuffling these costs around.

The best example of this is the eye-watering fees banks were charging for unauthorised overdrafts. Regulators intervened, taking a dim view of levying charges on the least well-off customers to cross-subsidise services for the wealthier ones. Now you will struggle to find an overdraft with an APR of less than 40 per cent.

For more than a decade, Bank governor Andrew Bailey has been warning that the free banking model is a “dangerous myth”. He has said that disguising the true costs of providing services could have encouraged mis-selling such as PPI as banks tried to make up the profits elsewhere.

Logically, a simpler model with transparent charges would be fairer, but it’s one that carries a considerable risk of customer desertion — evidenced by Wednesday’s front pages, and some furious back-pedalling from the HSBC press office.

I’m sure all the banks would love to start charging — although no bank wants to be the first to do so. 

But if negative interest rates were to come to the UK, could this force a wholesale rethink?

I’ve been thinking about this in the context of cash savings. The combination of “forced savings” and financial caution mean people are saving much more than usual in the UK, even though big providers like National Savings & Investments have slashed interest rates on deposits.

While holding cash is comforting, I do know that the rate of interest on my savings is effectively zero once inflation is taken into account (for millions of people getting zero interest, it is already costing you).

But how would I feel if my bank started charging me to hold that cash?

Let’s just say I would be extremely peeved. I have previously walked half a mile to use an ATM that wouldn’t charge me £1.75 to withdraw my own money. It’s the principle!

Early evidence from Europe, where they already have negative rates, shows that so far it’s only the wealthiest who are paying banks “reverse interest” on cash balances of hundreds of thousands of euros or Swiss francs.

I cannot see banks in the UK passing on charges to everyday savers. For one, it would cause uproar and could create liquidity issues if people swapped banking over-the-counter for under-the-mattress. And with studies showing millions of Britons have no savings at all, charging for deposits would do nothing for financial resilience.

But this means negative rates are another cost the banks will have to swallow — and we don’t yet know how low they could go. So what’s the solution?

Brits might balk at the thought of paying a monthly fee, but millions of people with packaged bank accounts already shell out around £15 a month for perks such as cashback on bills, cheap breakdown cover and travel or gadget insurance.

Essentially, the same cross-subsidisation forces are at work, as many people pay for these services but don’t use them (or claim they’ve been mis-sold when they find the various policy exclusions render them worthless). And banks seem more likely to trim the perks than persuade more of us to pay for them — note further cuts to Santander’s 123 account this week.

What about charging the wealthiest customers more? The problem there is they often get similar perks for nothing via premier banking, as the banks hope to cross-sell premium services such as investment advice and wealth management.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, thinks the banks will become more creative in passing on charges to the masses.

“In the future, I could see banks charging for posting paper statements, providing a cheque book, replacement cards, and even levying charges on transfers,” she says.

The future of bank branches is a crucial part of this debate. Used by dwindling numbers of people, they are a growing cost burden. Those who prefer online banking might resent cross-subsidising this part of the service — but banks can hardly charge an entry fee to customers who bank in-branch. 

“Fewer people bank in-branch, but the problem is those that do just can’t do without them,” Ms Coles says.

I feel certain that more banks will close branches as they attempt to cut costs, but if ATMs vanish with them, more people will have to pay to take money out — and studies show it’s the elderly and poorest in society who are most likely to be cash dependent.

For all of these reasons, I feel the likelihood of legislation is rising, taking the problem out of the banks’ hands and passing it to regulators and politicians.

The Treasury launched a call for evidence on access to cash this month, asking how the UK could legislate for an “appropriate” cash network, and which regulatory body should be charged with maintaining it. If you’re cash rich but time poor, leave a comment below and I’ll submit a bumper response from FT readers — and I won’t charge you a penny for your thoughts.

India takes its tussle with China to the high seas

New Delhi has shifted focus from the Himalayas to the oceans to send a warning to Beijing

Amy Kazmin in New Delhi

India’s navy may be heavily outgunned, but it can still cause problems for China at sea © Indranil Mukherjee/AFP via Getty

After 20 Indian soldiers were killed in a skirmish with Chinese troops along the Himalayan border this summer, New Delhi quietly dispatched a frontline warship on an unusual voyage to the South China Sea.

Little was revealed publicly about the vessel or its mission. But Indian security analysts saw its unexpected presence in the heavily disputed waters as a clear warning to Beijing, which has made vast maritime claims there.

“The message was: Don’t mess in my backyard or otherwise I’ll mess in your backyard,” said Nitin Pai, director of the Takshashila Institution, a Bangalore-based think-tank.

The incident highlights how India’s Himalayan border tensions with China could have big repercussions thousands of kilometres away in the seas of Asia. New Delhi is shedding its reticence to unleash India’s maritime power and strengthen it security partnerships as it seeks to counter what is considers Chinese aggressions on its land border.

Last week, India invited Australia to join the US and Japan in the annual trilateral Malabar naval exercises in the Indian Ocean, a move seen by security analysts — including in Beijing — as a first step towards forging a strategic alliance to curb Chinese expansionism in the Indo-Pacific.

Although the four countries, collectively known as “the Quad”, are ostensibly focused on maritime concerns, New Delhi hopes its new partnerships will strengthen its hand in the border stand-off, which multiple rounds of high-level talks have failed to defuse.

“The security of the Himalayas lies east of the Malaccas,” Mr Pai said, referring to the narrow strait linking the Indian and Pacific oceans. “If you can’t solve the problem in the theatre you have, you have to enlarge the theatre.”

Abhijit Singh, a former naval officer and head of the maritime policy initiative at the Observer Research Foundation, said: “There are many ways India can signal to China it is not happy with the Chinese approach to resolving our boundary problem. One ways is . . . [to] raise the temperature at sea.”

However, Liu Zongyi, a South Asia specialist at the Shanghai Institutes for International Studies, wrote that India’s decision to “dance closely with Washington’s war waltz” in the Indo-Pacific was risky.

India hopes the Quad naval exercise will help it in its stand-off in the Himalayas © Nobuhiro Kubo/Reuters

“This is an obvious step to create a mini version of Nato in India,” he wrote of the Malabar exercises in the Global Times, China’s nationalist tabloid. “The formation of the military alliance in the Indian Ocean will inevitably stimulate other countries to take counter measures. Chances for military confrontations will intensify.”

India is outgunned by China’s navy, which boasts more sailors and weapons platforms such as guided missile destroyers, aircraft carriers and submarines. China is expanding its naval capacities far faster than India, too.

But retired naval commodore Uday Bhaskar said India still had a significant geographical advantage over China, given its location in the Indian Ocean, through which most of China’s energy supplies pass.

“Geography favours India,” said Mr Bhaskar, who is now director of the Society for Policy Studies, a think-tank. “Even with relatively modest capabilities, given India’s peninsula location, its like having a permanent aircraft carrier.”

A coterie of Indian strategists has long urged New Delhi’s navy to be assertive, including in the volatile South China Sea, as part of a long-term strategy to check Chinese power.

But India’s past Congress governments were reluctant to provoke China while Prime Minister Narendra Modi had also courted President Xi Jinping, seeking Chinese investment.

However, Beijing’s development of a network of Indian Ocean ports, including in Sri Lanka, Pakistan and Djibouti, created unease in New Delhi because of their potential military use. So, too, did China’s plans for a deepwater port in India’s neighbour Myanmar.

 “China’s presence in the Indian Ocean to our east and west is changing our perceptions of maritime security like nothing since the Europeans arrived at the end 15th century,” said Ashok Malik, policy adviser in India’s foreign ministry.

Analysts said it was the violence in the Himalayas that led New Delhi to shift from a defensive strategic posture towards greater maritime assertiveness after concluding that its relationship with China was fundamentally adversarial.

Multiple rounds of high-level talks have failed to ease tension on the Himalayan border © Mukhtar Khan/AP

“India is becoming more realistic,” said Mr Bhaskar. “Earlier, India was trying very hard to appease China.”

What form India’s maritime strategy will take is still being fiercely debated. Some hawks advocate responding to Beijing’s pressure by obstructing Chinese shipping. But Indian strategists are divided on such an approach, given the risks of affecting third countries and inadvertently creating a backlash.

India is planning to strengthen maritime infrastructure in its Andaman and Nicobar Islands, as well as building a $1.3bn deepwater port on Great Nicobar island. It is also strengthening defence co-operation with Washington, its old cold war nemesis.

An American P-8 Poseidon long-range maritime patrol aircraft refuelled at an Indian base in the Andaman and Nicobar Islands for the first time last month, and on Tuesday the two countries signed an agreement expanding military satellite information sharing.

While Indian and Chinese troops look set for a protracted stand-off through Ladakh’s brutal winter, analysts said the Indian Ocean and other Asian waters could well emerge as the more active theatre for Asia’s rival powers.

“It makes sense for India to be part of a multinational coalition countering China in the South China Sea,” said Mr Pai. “Apart from it being in India’s geopolitical interest to needle China, what China has done there is completely illegal.”

Brief: Why the US Wants to Give F-35s to the UAE

As Israel normalizes relations with Arab countries, a regional alliance against Iran grows larger.

By: Geopolitical Futures


The United States has helped Israel maintain its military superiority in the Arab-Israeli conflict for about as long as there has been an Arab-Israeli conflict. That hasn’t stopped Washington from arming Arab Gulf monarchies such as Saudi Arabia and the United Arab Emirates nominally opposed to Israel but largely absent from the conflict.

What Happened: 

Less than two weeks after the UAE and Israel signed a U.S.-brokered normalization agreement, the government in Abu Dhabi in September formally requested permission to buy F-35s, the unproven but incredibly expensive fighter aircraft decades in the making. 

Several U.S. legislators initially opposed the idea, saying it was happening too quickly and that it could negatively affect the military balance in the Middle East by inviting other countries to demand more U.S. weapons technologies. But it seems to be happening anyway, which would make the UAE the only country in the region besides Israel to have the F-35. Israel also opposed the idea at first but has since come around so long as the U.S. sells it more weapons than it does the UAE.

Bottom Line: 

Ignoring the economics of the U.S. military-industrial complex, this is mostly about Iran. As Israel normalizes relations with Arab countries, a regional alliance against Iran grows larger – a key objective for Washington's maximum pressure campaign against Tehran. With the F-35 sale, the U.S. is looking not to undercut Israel’s military edge in the region, but supplement it by equipping its Gulf allies.

Why A Fiscal Demise is Certain No Matter Who Wins the Election

by David Stockman


Known as the "Father of Reaganomics," David Stockman served as President Ronald Reagan's budget director and was a principal architect of his original effort to Make America Great Again.

In David's newest book Dump Trump: Why Conservatives Should Punt on November 3rd, he asserts that Trump’s disastrous lockdown and massive government spending, borrowing, and money printing has left conservatives with no choice but to not re-elect him. 


International Man: During his time as president, Trump has proven that he can push the Fed to keep interest rates at near-zero and print money at astronomical levels.

Have Trump and the Republicans set a new precedent, in which the Fed will bend to the will of Washington DC?

David Stockman: A few weeks back, one of the greatest anomalies of financial history quietly passed into the history books. I’m are referring to the fact that the yield on the 10-year US Treasury (UST) fell to an all-time low of 0.52%, prompting Deutsche Bank’s chief credit strategist to marvel out loud:

……the current nadir in the 10-year yield went back 234 years… The U.S. has been through depressions, deflations, wars, restrictive gold standard regimes, market crashes and many other major events, and never before have we seen yields so low.

There you have the essence of Donald Trump’s malefic legacy. He brow-beat the Fed into abject submission on interest rates, even as he opened the spending and borrowing spigots like never before.

That fraught combo is nothing less than a freak of financial nature. It is a temporary and incendiary condition spawned by the willful stupidity of Washington policymakers who should know better, but who, apparently, are enthrall to the crack-pot economics of Donald J. Trump.

This is what passes for fiscal policy in the Imperial City today. And it also tells you why the self-proclaimed "King of Debt" currently in the Oval Office will long be known as the father of America’s fiscal demise.

International Man: The government lockdown has created economic destruction on Main Street.

In your perspective, will we be seeing any change in the way this COVID hysteria is being handled depending on whether Trump or Biden wins?

David Stockman: The Donald’s mishandling of the COVID-19 pandemic was so colossal and fatal that it alone disqualifies him for a second term.

In launching the quarantines and stay-at-home orders last March and empowering a rogue task force of government doctors, career apparatchiks, and power-seeking swamp creatures to trample on the people’s livelihoods and liberties, Donald Trump committed one of the most fatal errors of any modern president.

He cannot be let off the hook on the grounds that he received bad advice. On the contrary, an actual conservative—or even Republican—president would have stoutly resisted the overnight lurch into the inherently unconstitutional and destructive regime of economic martial law that enveloped the nation within days.

Moreover, at the time and since then, there were never any medical facts or "science" that warranted what amounted to the most vicious assault on the domestic economy ever carried out by the agencies of government. That is, the Donald coveted the power and glory of the big job in the Oval Office, and in the hour of decision, he broke the American economy like never before.

Now he owns the breakage.

International Man: Trump has campaigned on the idea that he is responsible for creating "the greatest economy ever." There are tens of millions of unemployed Americans, much business activity is still halted or functioning at a snail’s pace, and there is talking of more bailouts.

What’s your take on this?

David Stockman: The Donald has not remotely created the greatest economy ever. The US was a debt- and speculation-entombed economy when he took the oath of office, and he only made it far worse—even before the coronavirus lockdowns sent it reeling.

But suffice it, here, to note that based on the lingua franca of economics—real GDP growth—the Donald’s score for his first 13 quarters in office, and before the COVID-19 lockdown tanked the economy in Q2 2020, was dead last among every president since 1948.

Annualized Real GDP Growth Rate Per Presidential Term, From Highest To Lowest;

1. Truman: 5.5%;

2. Kennedy-Johnson: 5.2%;

3. Clinton: 3.8%;

4. Reagan: 3.6%;

5. Carter: 3.2%;

6. Nixon-Ford: 2.7%;

7. Eisenhower: 25%;

8. Bush the Elder: 2.2%;

9. Bush the Younger: 1.9%;

10. Obama: 1.9%;

11. Trump: 1.8%.

But the larger point is that Trump’s wholehearted embrace of sheer fiscal and monetary madness has not only left the nation spiraling toward the Mother of all Financial Disasters, but he has also finally euthanized what remained of GOP fiscal rectitude. 

And without even a semblance of two-party competition on the fundamental matter of financial discipline in a 21st century interest group and PAC-driven Welfare State democracy, there is no apparent political route to restoring sustainable public finances.

To hear the Donald boast, first, he created the greatest economy in the history of the world; then, he shut it down to save 2.2 million lives; now, it’s rocketing back upward in a powerful "V," and soon America will be greater than ever before.

Well, that’s wrong

Needless to say, the Donald is bombastic, innumerate, economically illiterate and capable of picking pepper out of fly shit when it comes to looking for an utterly misleading number.

But since the allegedly powerhouse pre-COVID economy is his strongest claim to a second term, it is imperative that the preposterous content of the Donald’s delusional narrative be understood. It makes it clear that the "Greatest Economy Ever" slogan is bogus through and through.

Of course, there is one tiny element of truth to it: As measured at Q1 2020, before Lockdown Nation plunged the US economy into recession during Q2, real GDP at $19.254 trillion was indeed a US record.

Alas, so was the final quarter GDP level of every president since Harry S. Truman.

International Man: It’s clear that Wall Street is demonstrating a completely different reality than what is taking place on Main Street.

Has Trump proven that as long as the stock market is up, it doesn’t matter what’s really happening on Main Street?

David Stockman: Clubbing interest rates to the flat line in a $20 trillion GDP freighted down with $81 trillion of public and private debts does absolutely nothing for Main Street or the real economy. 

That’s because Peak Debt and rampant speculation have essentially clogged the traditional credit channel of monetary policy transmission to Main Street, whereby it was held historically that increased housing and business investment would ensue.

No longer. The Fed’s cheap credit never really leaves the canyons of Wall Street, where it fulsomely rewards carry-traders and risk asset speculators because zero cost money is always and everywhere the mother’s milk of leveraged speculation. 

And it also causes corporate C-suites to become maniacally obsessed with goosing their stock options via financial engineering maneuvers such as stock buybacks and M&A deals, which supplant equity and financial resilience with debt and financial fragility.

So when business bankruptcies soar to unprecedented levels in the month ahead as the economy reels from the folly of Lockdown Nation, the financial fragility part will become crystal clear.

But it also needs to be recalled that even as the interest rate clubbers at the Fed fostered a massive explosion of business debt after the 2008 financial crisis, it did not translate into any growth in productive investment at all.

During the period between the end of 2007 and the end of 2018,

Real consumption of fixed business assets rose from $1.497 trillion to $2.202 trillion, or by 47.1%; 

Real investment in new fixed business assets increased from $2.031 trillion to $2.781 trillion, or by just 36.9%.

In other words, contrary to Wall Street ballyhoo about "strong" business investment, the US economy was essentially eating its own tail as it consumed existing business assets in annual production at a faster pace than it replaced them with new investments.

International Man: If Biden and Harris win the election, will the country be any better off for it?

David Stockman: Should the Dems prevail on November 3, Sleepy Joe will function as the on-call teleprompter-reading pastor of Woke World, while Kamala cracks a leftish whip as head of the Harris Regency government and the defrocked Clintonistas and progressive-left Jacobins clamber aboard the machinery of state throughout the Imperial City.

Call it the attempted restoration of a ruling class that has virtually gutted American prosperity and democratic function alike during the last 3-4 decades. Yet it now has the gall to claim that the present fractionated state of the union is owing solely to the Donald’s obnoxiously pugnacious self-aggrandizement and his purported dog whistles to the racist, red-necked, un-woke flotsam and jetsam of Flyover America.

I think not. The sharp clash between the stentorian politics of the bi-coastal elites and the populist uprising in Flyover America that brought the toxic persona of Donald Trump to the Oval Office is rooted in economics, not racism or the cultural backwardness and benighted sensibilities of America’s town and country yokels.

Moreover, these economic roots well pre-dated the Donald’s fateful trip down the escalator at Trump Tower in June 2015.

As to the matter of whether the Dems understand this or have a policy to ameliorate the underlying conditions: Fuggetaboutit!

The chance that the Dems will tell the Fed to stop manufacturing windfall gains for the 1% and 10% who mostly vote Republican and desist in savaging workers in competitively impacted global markets is somewhere between zero and none.

Indeed, if elected, the Dems may attempt to take away the working class’ private health insurance, guns, cheap fossil fuels for their homes and cars and, with the coronavirus loose in the land, their ability to meander in the malls and tie one on in the bars and sports stadiums. 

But what they won’t sideline is the unelected monetary politburo that is poisoning capitalist prosperity and political comity alike in America today.

What they also will not address, even as they go about destroying still more jobs with the $15 minimum wage, punitive taxes on job creators, and economy-wrecking lockdowns and mask-ups, is the elephant in the room—the destructive impact of three of government’s most wrong-head creations—welfare, the war on drugs, and public-school monopolies—on black family life, socialization, and economic mobility.