The sensitivity of the London clearing bank profits to changes in Bank rate: 1951–1970

Abstract

Commercial banks tend to make profits which are not associated with efficiency in resource use. Since the output of bank deposits is subject to government control, the industry tends to generate a surplus over competitive profits, and this is particularly so when a collective agreement prevents the payment of interest on demand deposits, or the implicit interest payment is below the competitive rate and lags behind the changes in the rate of earnings on bank assets. In 1967, the National Board for Prices and Incomes reported that the London clearing bank profits had been ‘… excessive in the sense that they have accrued in part simply from a high average level of Bank Rate…’. 1 The report referred to an ‘endowment element’ in the profits which originated from the clearers' collective agreement on nonpayment of interest on demand deposits: although the bank charges on demand deposits were being netted for an offsetting allowance, a surplus was generated because ‘… the rate of offsetting allowance does not a...