Save Billions

SAVE BILLIONS New blog admin August 13, 2025 Save Billions, Cut the Interest the Government Pays on Bank Reserves In the intricate world of monetary policy, small changes in how the Bank of England operates can have a huge financial impact. One such example would be for the Government to amend the amount of interest it pays on bank reserves. Let’s say the Bank of England reduced interest on 10% of Commercial Bank reserves; this move could save billions in public funds.    What Are Bank Reserves? Commercial Banks are required to hold a portion of their deposits in reserve — either in their vaults or, more commonly, in accounts at the Bank of England. These reserves ensure that Commercial Banks have enough liquidity to meet withdrawal demands and maintain financial stability. The Bank of England pays interest to commercial banks, as these reserves are used as a tool to influence short-term interest rates, manage inflation, and maintain financial stability. The Bank of England is technically independent, but any profits/losses ultimately go to or come from the Treasury (the Government). When the Bank of England pays interest on the Commercial Bank reserves, the Treasury pays the interest on the Commercial Bank reserves. What would happen if there were a reduction in the interest rates paid to the Commercial Bank reserves? Let’s say the Bank of England decides that 10% of the total reserves held by Commercial Banks will no longer earn interest. This move effectively reduces the Bank of England’s interest expenses. Since interest payments on reserves are essentially a cost to the government (via the Bank of England), not paying interest on even a small portion can generate significant savings.   EXAMPLE: In early 2025, commercial banks in the UK held approximately £760 billion in reserves at the Bank of England. If the Bank of England pays a 5.25% interest rate, that’s £39.9 billion a year in payments to Commercial Banks. Removing interest from just 10% of the reserves would save £4 billion annually; at 20%, it would be £8 billion (rounded) annually, and so on.  At 50% it would be £20 billion annually.   Not so long ago, some Commercial Banks required bailing out. Is now the time for the commercial banks to repay the goodwill shown by the Government and ultimately us as taxpayers and provide support to the UK? There are trade-offs. Commercial Banks may choose not to hold reserves with the Bank of England if not fully compensated, which could impact liquidity. However, this is unlikely as reserves are required to meet their liquidity and regulatory requirements, and obtaining some interest is better than no interest.  Both the Bank of England and Commercial Banks rely on each other for financial stability, liquidity, and interest rates.   Working together is key and in both interests. Now, let’s say for 2025 the government asks the banks to take a 50% cut in interest to help bail out the UK, 40% cut in 2026, 30% cut in 2027, 20% cut in 2028, and 10% cut in 2029. The total savings to the UK would be £59 billion.  These figures are based on the current interest rate being paid by the Bank of England to commercial banks and the current commercial bank reserve figures.  Over time, rates and reserves will change; this is just a demonstration of where significant savings can be achieved. To put the saving into perspective, the Defence budget for 2025 is just over £60 billion.