Banks have a dangerous degree of power over the interest rate

On the opposition's side, Team Lithuania is more than happy to oppose the motion. The contention that the banking sector suffers from a lack of competition is completely out of reality. It is based on the premise that evil bankers will exploit consumers, because they have monopoly power over lending. While we certainly agree that the interest rates have risen recently, it has happened because banks are less secure about the solvency of the borrowers. Since the borrowers are more likely to default in current economic conditions, the bankers have to charge a risk premium to compensate for possible losses. This has nothing to do with competition - in fact, competition in the sector is so strong so that it has driven the interest rates down recently despite poor economic outlook – it is supported by the source which proposition has showed to us to prove lack of competition (and there is completely nothing about the lack of competition in there) [[http://www.bankingtimes.co.uk/26082009-personal-loan-margins-increase-tenfold/]]. The whole notion that competition is weak is really absurd when you just look around and see what is happening around: an average country has many commercial banks, credit unions and similar financial intermediaries whose purpose is to lend money. We are quite nice, so we agree with some of the statements of the proposition, for instance, this one: “It seem, on the face of it, that banks have a plausible right to compensate for this risk by charging risky clients high interest rates.” But we certainly disagree with the superficial analysis that proposition makes when trying to prove how the cap would benefit all of the stakeholders. 1) The notion that banks suffer from making loans to high-risk customers does not make sense. If it were so, they would simply not give these loans. They charge interest rates which reflect borrowers’ probability of default. If one defaults, bank will not be in trouble, because it will be offset by other clients who repay debt. 2) The claim that a person suffers emotionally when she defaults on her debt is arguably true. However, by capping the interest rates you would simply take away opportunities from people, because banks will not lend to them at all – the expected return will not be enough taking into account the default risk. Just having this opportunity to borrow can be very valuable for some people – so valuable, so that they would be willing to take the risk of being emotionally and financially harmed later on in case something bad happens, and as a government you do not have the moral right to deny the individual her right. We also want to point out that the whole government’s line in the debate simply does not make sense. They identify the current economic crisis as the problem. Then they contend that by capping interest rates on personal lending to 20% further crises could be prevented. Note that there is absolutely no logical link here; at least government has not provided us with any mechanism how the cap would reduce the possibility of the economic crisis. And since we know quite a bit about economics, we think that there is no link indeed. The government's whole statistics show increasing interest rates in recent times. Here they mix up causes and consequences. They see rising interest rates now and think that capping them would help to prevent crisis, while actually to understand how to prevent crisis one should go back to the past and examine policies at that time. We see that in the US the interest rates (federal funds rate) were held at extremely low levels, arguably inducing unsustainable lending [[http://www.bankrate.com/brm/news/fed/fedchart.asp]]. The majority of the economists agree that this was one of the main reasons of rising house prices and consequent boom and bust. Another reason, obviously, was abundant use of financial derivatives which were not valued properly, because they were very complicated financial instruments. Also, the amount of personal loans with interest rate over 20% is small and it could not have a strong impact on the economy even if we believed that there is some link between the two (and we do not believe that anyway). Arguing that high interest rates charged by the banks caused the crisis is an original idea, but also a weird one and we do not see why we should believe it.