The Globe and Mail, while a business oriented newspaper takes a decidedly consumer approach to their headline, without covering both sides of the story – their headline is headline grabbing without pointing out one of the real dangers implicit in such low rates.

Banks fail to match rate cut – again | Globe and Mail

Canada’s banks, squeezed by tight credit conditions, only passed two-thirds of the central bank’s rate cut on to consumers, posing a challenge for Ottawa as the economy withers.

We can debate the amount of bank profits and I won’t go there in this article. The point here is the impact of reduced interest rates. This is a mathematical point that impacts banks, and it does at a time when banks are expected to re-capitalize and improve their equity base which in turn will improve consumer confidence in the banks.

The bank rate is a lending rate. The Bank of Canada as with all central banks use the rate as an indicator of central bank intent for the economy. It is one of many indicators and signals the bank uses. It is also indicative the rate that banks can borrow or invest with the Bank of Canada.

When bank rate are say 10% then there is freedom for banks to allow a spread between deposit and loan rates. A rate of 10 % permits for arguments sake, deposit rates of 7% and a loan rate of 13%. (those are theoretical rates). Controversial I know but that’s banking – we can also debate the amount of the spread, but thats not todays point.

When rates drop to current levels of 1.5% the flexibility for setting deposit rates is almost eliminated. Yet the expectation is for lending rates to be low too – so the ability to generate any revenue is dramatically reduced. This is the quandry banks feel in a low interest rate environment.