Bank loan rates

Lots of reasons. They pay high salaries and bonuses “to attract the talent” but in reality the people working there are no better than anywhere else. They have no clue about efficiency compared to a genuinely competitive sector like retail.

Then there is government regulation both from the national parliament but also the EU. Arguably needed but implemented badly. I have friends doing IT consultancy there on eye-watering day rates… one year they do a set of changes to comply with a law, the next they undo it again as other regulations come in.

Then there is fraud on a massive scale and never properly investigated or dealt with. Then there are tax raids by governments who know they are easy targets. Then there is PPI and other scams where way more people have claimed than were ever actually miss-sold the questionable product.

Regarding savings interest that is again down to government intervention - they no longer need your money to make loans as the various government schemes to lower borrowing costs do that for them.

Mike . I think you're seeing this very short term and projecting out unrealistic return assumptions.

As bg says you are underestimating bank profitability. Some banks have been doing very well since the GFC (take the likes of JPMorgan or Wells Fargo). What has been suppressing the profitability for many is legacy issues around the GFC (mainly huge legal costs), some mis-selling issues (PPI, collars) and substantially increased regulation (Basel 3, Dodd-Frank, Mifid 2 etc). For many global banks that cost is now behind them. With regulations like Basel II+/III, the Risk Weighted Asset (RWA) capital charges applied of loans to SMEs, on property and to consumers materially changed (RWA multiplies their Tier 1 capital). It's made certain types of loan very uneconomical for banks to create. It's much more profitable for banks to create loans to on high quality residential property (say 50% RWA) or just buy gilts (0% RWA) than create SME loans or risky property which can attract a 100-125% RWA factor. Banks have adjusted their lending to account for this. It's reduced profitability in these areas but also reduced risk substantially. In some ways it was low depo rates, triggered by central bank easing (created demand for yield), and the regulatory changes to banks (creating a need for loan creation) that really opened a gap for P2P. P2P, however, often is occupying the more risky segments of the market. No bank would create loans of the quality of SS, for example. 

We've been in a unparalleled environment for credit risk (i.e very benign). In a stress environment defaults could rise three to tenfold. Banks NPV their loans to take account of defaults and recoveries (i.e expected LGDs) and take reserves. I follow a similar approach but I think I'm the exception rather than the norm. Most lenders on this forum seem to take no reserves and don't NPV. I note that even some of the P2P investment trusts (like P2P Global) initially were not applying NPV and reserving processes. This inflated their initial returns but led to much lower returns later as NPLs built up. Lender's P2P portfolios could equally suffer really badly in a downturn. 

Also I think you do not understand how banks operate. It's a common misconception (say found in economic textbooks) that banks act simply as intermediaries. In this view deposits are created by the saving decisions of households, and banks then lend out those existing deposits to borrowers. This is simply not true. Saving does not by itself increase the deposits for banks to lend. In fact, commercial banks are the creators of deposit money. The limits on money creation by banks are profitability/solvency and prudential regulation (Tier I capital, RWA etc), not deposits. Might be worth reading this BoE piece on money creation (link) since most people find it hard to get out of the "textbook" mentality. It also will explain why banks simply don't need to pay savers for their deposits (especially at the ZLB).