If the combative chief executive of the British Bankers’ Association, Angela Knight, had her way, we’d all feel sorry for her members.

They kindly passed on last week’s 1.5 percentage point cut in Bank rate to existing borrowers with standard variable rates (SVRs) — with only a little prompting — and would dearly love to do the same for new borrowers, if only they hadn’t been brought to their knees by the credit crunch.

While Bank rate used to determine what we all pay for our mortgages, now it’s wholesale rates — specifically the three-month London Inter-bank Offered Rate (Libor) for trackers, or swap rates for fixes.

They used to be pretty close to Bank rate, but the credit crunch has caused them to soar — and that’s why banks can’t afford to pass on rate cuts in full.

Or so they say. Cast your eye over the trading statements issued last week by the “government” banks — Royal Bank of Scotland, and the soon-to-be-merged Lloyds TSB and Halifax Bank of Scotland — and a rather different picture emerges.

While all the focus was on HBOS’s £5.1 billion of writedowns this year, the bank admitted it was still making plenty of money from UK mortgages despite the higher cost of funding.

It was the same over at Royal Bank of Scotland. “RBS has taken advantage of opportunities to write good credit quality mortgages at attractive margins,” its statement said.

And as for the banks’ argument that they need to hold back some of the cut so they can continue to pay decent rates to savers, it doesn’t bear scrutiny either. Banks have long treated loyal savers with contempt, paying them on average about 3%, while drumming up new business with rates as high as 6% or even 7%.

Forgive the City jargon, but HBOS’s interim management statement bears repeating. “The retail net interest margin for the year as a whole is expected to be broadly stable relative to the margin reported for the first half of 2008, benefiting from the extended life and repricing of mortgages, despite higher funding costs.”

The net interest margin is the difference between what HBOS pays out to savers and what it gets in from borrowers as a proportion of its assets — 1.62% in the first half of the year, up from 1.59% in the previous six months. Even though funding costs are higher, HBOS expects to make the same in the second half because it’s charging a bigger margin on its mortgages and, because of the general lending freeze, customers are remortgaging away less.

Two-year swap rates, the money market rates on which two-year fixes are based, were at 6.25% at the end of June whereas the average two-year fixed rate was 6.6% — a 0.35% margin. Now, two-year swap rates are coming down, but fixed rates aren’t coming down so quickly. By the end of September, swaps were at 5.33% but the average fix was 5.96%, a 0.63% mark up.

The margins aren’t as fat on trackers, but lenders aren’t exactly losing money either. These aren’t pure profit of course, but you can be sure that when the dust settles the banks’ UK operations are going to emerge in much better shape. Reduced competition will allow them to keep margins high, just as they’ve always wanted.

The government might now have the opportunity to end these practices while maintaining its promise to stay at arm’s length. The Financial Services Authority is consulting on a big extension of its powers over banks’ “conduct of business”, including deposit taking.

The banks will argue that new regulations will add to their costs, but the industry has been far too opaque for far too long, and if they’re left unchecked the credit crunch will just be another excuse to boost profits.

Kathryn Cooper is editor of the Money section

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