You would think that the business model of a retail bank is fairly straightforward. You take in deposits on which you pay a low rate of interest and you make loans on which you charge a high rate of interest. The difference between the two rates of interest is your margin. Fractional reserve banking surely makes this a no-brainer – you don’t even have to have all the money on deposit that you are lending out – you just create it out of thin air with some clicks of the mouse.

So you’d think that this is a no-lose business model, and that the rising trend in interest rates should mean happy days for banks around the world. So why are so many of them failing? Why do some indicators suggest that we are already in a financial crisis on a par with 2008? I think there are three factors behind this embryonic crisis which have converged to form a perfect storm.

Reason 1 – High Stret Bank Complacency

The first is the complacency brought on by fifteen years of emergency interest rates at their lowest level in recorded history. We all suffer from recency bias, including risk managers at retail banks. There approach has been to invest in government treasury bonds as a safe haven at a time when money was almost free. There was so little difference between short, medium and long term bond yields that they probably thought it was smart to buy the longer term bonds and avoid the hassle and cost of regular renewal of short term instruments.

Reason 2 – Central Bank Meddling

Which brings us to the second factor – central banks. It’s hard to avoid a feeling of contempt for these technocrats who have so regularly failed to see what should have been obvious and have consistently been a day late and a dollar short on responding to each new ‘crisis’, often one of their own making.

If there was an award for the most out-of-their-depth person in public office, competition would be stiff to say the least. My top two candidates would be the Archbishop of Canterbury and the governor of the Bank of England. To be fair, there are only two things that Andrew Bailey gets wrong – everything he says and everything he does. What he and his Transatlantic oppo Jerome Powell have done is to raise interest rates further and faster than ever before. In fighting the inflation created by their very own money printing during Banana Syndrome, they have gone on record as saying that they will keep on raising rates until something in the economy breaks. Surely the trail of destruction from Silicon Valley Bank to Credit Suisse is the canary in the coalmine that says they have succeeded?

Reason 3 – Savvy Consumers With Better Choices

But there’s a third element that has really cemented the impact of the first two and triggered the carnage that we’re starting to see – the convergence of high inflation and a more savvy, informed consumer with better choices than the 1970s generation ever had.  With so many fat, lazy, complacent High Street banks continuing to offer less than 1% interest per annum on deposits, consumers have realized that they need to look elsewhere to limit the impact of currency debasement on their wealth.

And they like what they’re seeing. In the final three months of 2022 there was a 317% increase in switching between savings accounts. According to data from Paragon Bank, in the final quarter of 2021 just £17.6 billion was moved into new accounts. Fast forward twelve months and that figure was £73.5 billion.

Even this remarkable data is just a snapshot of the total market based on 34 banks and building societies. It’s the newer players that have responded by raising rates in line with the Bank Of England’s frequent hikes while the bloated old fat cats on the High Street do their usual trick of treating their customers like something they stood in on the pavement. It’s weird that we still call them High Street banks as their branches are disappearing faster than supporters of Tory councils. A freshly boarded-up branch is coming to a town near you any time now.

What’s remarkable about the last six months is that the situation has become so bad that it’s finally overcome consumers’ biggest inertia of all – changing bank accounts.  For years we’ve shopped around for the best deals on broadband, mobile phones and utility bills. But the perceived hassle of changing banks has been a step too far.

This mobile and tech savvy generation thinks nothing of downloading a new app if they see a social media post offering an attractive interest rate. It’s now so easy to switch and the rewards are so tangible that they are doing it in their tens of thousands. What this means is a mass exodus of deposits that combines with unrealized losses on long term bonds to put banks in a delicate position. If they are forced to sell the bonds at a loss to meet withdrawal requirements, they have to lean on their equity and reserves to cover the shortfall. If the demand turns into a virtual bank run you trigger the kind of collapse that we’ve seen in America and even in that previously safest of havens, Switzerland.

One question that might be on your mind is, if we’re supposed to be in the middle of a cost of living crisis, where is the money coming from to make all these transfers to higher rate savings accounts? Well, the answer lies in the root cause of the inflation we are now experiencing – the gobloads of cash handed out to people forced to stay at home during banana syndrome lockdowns.

When you can’t travel, eat out or buy clothes, the money tends to accumulate in your account. In fact, in the UK alone current account deposits peaked at £460 billion in September of 2022. Perhaps this is the real clue to why the bank account inertia was finally overcome – people actually found themselves with a decent chunk of savings on which they began to realise they were being robbed. After all, 0.01% doesn’t really matter if there’s only £247 in your account. But if there’s £10,247 it starts to mean something.

Just to give you a flavour of what’s on offer if you are tempted to switch, Yorkshire Building Society is offering 3.35% on an easy access account. Lock up your funds for a year and niche bank Al Rayan will pay 4.31%. Streambank is even better at 4.9% for a one year fix while Raisin partner Isbank will pay 4.95% if you accept a 3 year lock-in. These are nothing like the 10-16% returns available to Beaufort members on our bonds and loan notes, but they are a much better option for medium term cash balances than the High Street banks.

The best rates of all are on offer to regular savers but the amounts are pretty small. First Direct is paying 7% fixed for a year but the most you can save is £300 a month. A one year fixed savings plan with Lloyds will pay 6.25% and they put a cap of £400 a month on what you can save.

For me, the development of alternative neo-banks and the ease with which you can set up accounts on your phone is the realisation of a revolution in financial services, especially among younger people. If I think back to when I first started having a bank account in the 1970s, there were only the big brand High Street options available. They had to differentiate themselves on service so you had things like a local bank manager who knew his customers.

Some of my contemporaries at school went into banking with the proud ambition of one day being a Branch Manager, just like Captain Mainwaring in Dads Army. Today, if you are lucky enough to come across a human being in a bank branch, chances are their previous job was in Primark. They are marginally more helpful than online chatbots but it’s a close run thing. The default response is ‘computer says no’.

What they’ve done is to systematically remove their USPs in the name of cost cutting so that they become a commodity. That gives them no advantage over a start-up and all the disadvantages of legacy IT systems, enormous pension fund liabilities and a heavy burden of regulation. Add in the threat of a central bank digital currency forcing us to go direct to Andrew Bailey and you can see a clear and present risk to the future of the biggest and longest established financial institutions in the country. Yet, I still see their shares being promoted as a ‘buy’ in the Sunday papers and financial magazines. Personally, on the evidence of the past six months, bank shares are right up there with the Chinese stock market as completely uninvestable.