British Banks Under Pressure To Pass On Rate Cut To Borrowers

London, England (AHN) - Irked by the refusal of British banks to pass on the last two benchmark interest rate cuts to borrowers, the U.K. Treasury called on Friday morning heads of banks to explain why they could not cut down their lending rates to consumers.

Present at the meeting were representatives of major banks such as HSBC, Barclays, RBS and Lloyds TSB. Abbey, Lloyds and Bradford & Bingley promised to the Chancellor of the Exchequer Alistair Darling they will decrease their standard variable rates for mortgage clients.

But the other banks did not say when or by how much they will reduce their rates. MoneyFact researchers estimate the average standard variable rates of U.K. at 6.79 percent, while with the two recent Bank of England rate cuts, key lending rates had gone down to 3 percent. Since the mid-1940s, this is the first time that the difference between base rate and mortgage rate has widened to more than double.

The Council of Mortgage Lenders said they plan to reduce their rates from 0.5 to 1.5 percentage points in the coming weeks. Finance experts said the British banks will probably decrease their lending rates by half and keep the remaining 50 percent for themselves to improve their balance sheets.

Under the law, Darling could not apply legal sanctions on British banks for not cutting their rates. He admitted he could only try moral suasion as he said, quoted by Guardian Unlimited, "I believe that it is imperative that banks realize they have got to play their part in helping businesses and helping people, and one of the key ways they can do that is by passing those interest rate cuts through."

But John McFall, the chairman of the Treasury select committee, was less diplomatic in urging the chancellor to apply firmer pressure on the financial institutions. McFall explained, "Having got themselves into this mess it was the taxpayers that bailed then out. That's the issue here."