The Credit Crunch: Good News For Savers?
The 'credit crunch' is a subject that's rarely far from the headlines these days, with analysts and experts predicting various levels of economic disaster to unfold over the next few months and years. While most people now accept that the USA is in recession, opinion is still divided over just how bad things are going to get here in the UK.
Nonetheless, there is one group of people who could actually stand to gain from this whole mess: savers.
To see why, we need to take a quick look at what the current crisis is all about.
Inter-Bank Credit Drying Up
In essence, banks are finding it difficult to borrow money to finance their operations, as the results of some dubious financial practices by city dealers come home to roost. Many banks are facing huge losses because of these deals, and until the full extent of these losses become known, the supply of credit is shrinking as their creditworthiness comes under question.
Banks such as Northern Rock were severely affected by this situation, as their whole business model was centered around using cheap credit to finance their own mortgage lending, and when this credit source dried up, they had nowhere to turn to to raise funds except the bank of last resort, the Bank of England.
A Borrower And A Lender Be...
Other banks have been less affected as they have followed the more traditional banking model of using customer deposits in the form of savings to provide a greater portion of the funds they need to keep trading. Simply put, they borrow money off their customers, pay interest on it, and lend it to other customers at a higher rate of interest and so make a profit.
This aspect of banking is becoming ever more important as raising money by borrowing off other banks becomes harder, and so banks are looking to increase the mount of money they can borrow off their customers. How will they do this?
Higher Interest
By offering more attractive interest rates on their savings accounts in the hope of enticing more people to open accounts with them.
So, while borrowers feel the pinch and the economy as a whole enters stormy waters, people with spare funds could do worse than take advantage of some of the high interest savings accounts we're likely to see coming onto the market before this whole sorry credit crunch mess is cleared up.
