8.—3.

There is no fixed figure which can be quoted as the actual margin, which varies as between deposits of different terms, and as between overdrafts yielding different rates of interest; it may be mentioned however, that the margin between the minimum overdraft rate and the twenty-four months' fixeddeposit rate is at present 2 per cent., though the margin is only 1-| per cent, and even § per cent, in respect of may fixed deposits still current. From the margin between the deposit and overdraft rates the banks have to make provision for a considerable portion of organization and running-expenses, reserves, depreciation, bad debts, and income-taxation ; after making these provisions the margin left for net profit is extremely narrow. For taxation purposes it is arbitrarily assumed by the Taxation Department that the income earned by each bank is constantly 30s. on each £100 of the total average assets and liabilities of the bank for the four quarters of the year, less bad debts actually written off and the income on tax-free securities. On the fictitious income computed on this arbitrary basis the banks are required to pay income-tax at the maximum rate. No allowance is made for the fact that in lean years bank profits represent a much smaller proportion of total assets and liabilities than in good years. The margin between overdraft and deposit rates is required to furnish income-taxation to the extent of 17s. 6d. for each £100 of overdrafts plus each £100 of deposits, and this fact, of course, must be taken into account when fixing the minimum overdraft rates. The necessity of having a margin between overdraft and deposit rates indicates the fact that bank overdraft and discount rates depend to a large extent on the rates paid for fixed deposits. What then, it may be asked, determines the rates paid by the banks for fixed deposits 1 The answer is, that these rates depend on the interaction of supply and demand for deposits. It is clear that, to preserve what the banks consider a proper volume of deposits, it is necessary for them to offer rates which will enable them to compete effectively with the rates offered by the competitive institutions, such as Government Departments, including the Post Office Savings-bank and Public Trust Department, also many trading concerns. In this connection the following official statement by the chairman of the associated banks was published on 27th February, 1933 :— Were overdraft rates to be reduced without adequate adjustments being made .in the method of taxing bank incomes, the inevitable and inescapable result would be to curtail the banks' means of assisting their customers and the community in general. The banks are willing to provide additional relief to the present situation by way of further reduction in interest rates if, to enable them to do so, some reasonable and fair alterations are made in respect of their income taxation, and if the Government rates for deposits are suitably reduced. Further reductions in deposit and advance rates were subsequently made as indicated in the reply to question 2. Question 2. To what extent has interest on overdrafts and other advances been reduced, and what proportion of accounts has benefited ? Answer : During the past four years the minimum rates for overdrafts and discounts have been decreased as under :On Ist November, 193.1—Reduced from 7 per cent, to per cent. On Ist September, 1932 —Reduced from 6f per cent, to 6 per cent. On Ist May, 1933 —Reduced from 6 per cent, to 5 per cent. The present minimum rate is 5 per cent. All accounts have benefited. During the same period fixed-deposit rates were reduced as under (reductions applied to fresh deposits of all terms from three months to twenty-four months, but only the twenty-four months' rates are quoted here to illustrate the degree of reduction) : On Ist August, 1931—Reduced from 5 per cent, to 4f per cent. On Ist June, 1932 —Reduced from iw per cent, to 4 per cent. On 2nd December, 1932 —Reduced from 4 per cent, to 3J per cent. On 11th July, 1933 —Reduced from 3J per cent, to 3 per cent. The present rate for twenty-four months' deposits is 3 per cent. It should be mentioned that these reductions apply only to deposits taken subsequently to the dates mentioned, and that the customers whose deposits were already current on those dates continued to receive the benefit of those higher rates until their deposits matured—for example, though the twentyfour months' rate was reduced from 4 per cent, to 3| per cent, on 2nd December, 1932, a considerable volume of fixed deposits are still receiving the 4 per cent, rate, and some even 4 J per cent., though the present rate quoted is only 3 per cent., so that, in view of the reductions in overdraft rates during the past few years, it is clear that a material proportion of the banks' overdraft deposit business has been unremunerative to the banks during that period. This can be illustrated by taking the case of fixed deposits receiving 4J per cent, concurrently with the existence of the minimum overdraft rate of 5 per cent. The margin between the two rates is 10s., which margin is obviously inadequate to provide the expenses in respect of such business —i.e., 17s. 6d. income-taxation in respect of each £100 of such overdrafts plus each £100 of such fixed deposits and, in addition, a proportion of other overhead charges and trading expenses. Question 3. To what extent are variations in interest - rates reflected in the number and volume of applications for advances ? Answer : It is a well-known economic fact that the tendency of higher rates is towards lessening the number and volume of applications for advances, and that the tendency of lower rates is to increase the number and volume of applications. However, the variations in the minimum rates during the past twelve years have not exceeded a range of 2 per cent., and with the exception of the recent reduction from 6 per cent, to 5 per cent., the alterations have been only in J per cent, steps.

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