The low remuneration of deposits has provoked harsh criticism within the current Coalition Government. Now Sumar goes further and its electoral program includes, among other measures, the regulation of what banks pay for these products. A proposal that clashes with a recent ruling from the European Central Bank (ECB) that warns that “administrative control of deposit rates could interfere with credit intermediation.” Or what is the same, it has a negative impact on the flow of credit.
The document presented this Thursday by the party led by Yolanda Díaz contemplates intervening in the bank deposit market through “a mechanism that links the interest on deposits to the interest on loans.” In her opinion, “this will prevent both oligopolistic practices and eventual deposit leaks that could cause liquidity crises in financial institutions.” The proposal lies in the current gap that exists between what entities pay for deposits and what they charge for their credits: around two points of difference, after closing the remuneration of deposits at 1.63% in May, while the Mortgage credit rates stood at 3.69%, according to data from the Bank of Spain.
A priori, this intervention would force entities to pay more for fixed-term deposits, but, according to the body chaired by Christine Lagarde, it would have more risks than potential benefits for both the real economy and financial institutions. And so it has been made known before a consultation of the Belgian government on three bills that propose fixing a remuneration in savings accounts, linking an interest rate on deposits and the introduction of a protected savings rate for deposits.
It would raise the cost of credit and put solvency at risk
The ECB recalls that deposit price interference was a contributing factor to the US savings and loan crisis in the 1980s and believes it has a double negative effect. To begin with, it points out that deposits constitute an important source of financing for a significant number of entities (in the specific case of Belgium, but that it is extensible to other European entities).
“A sudden increase in the level of remuneration of deposits proposed in the bills suddenly exploded the financing costs of credit institutions.” They will also have to absorb this negative impact or offset it, at least in part, by passing the higher financing costs on to customers, for example in the form of higher loans.
But this had another negative reading, which would affect both financial institutions and the economy. An increase in financing costs would cause a further slowdown in demand, a consequence that can simply be appreciated with the rise in interest rates and its effect on the Euribor, and, therefore, lower credit growth.
And it would join the defense made by the ECB that the secretory Sustainable Profits, Since This Results in “A Capitalized, Institutions That Operate Competitively And Can Continuously Lend To Clients On Conditions As Well As Resist Potential Macroeconomic Shocks “.
In addition, the ECB explains that “the profitability (or lack thereof) of credit depends on a variety of elements, one of which is the net interest rate margin” and points out that using legislation to set the interest rate of deposits increases the prospect of unintended consequences, especially when macroeconomic conditions change.
In conclusion, the document released by the agency recalls that the average return on equity of Belgian banks stood at 9.9% in 2022, which for the agency is not excessive at all. It must be taken into account that during the years of negative rates this ratio was significantly lower. Finally, it also explains that “in a market regulating the prices of deposits, the smallest credit institutions and the credit institutions most dependent on deposits would be the ones that would be affected the most.”
Yet the ECB document is not binding. When the Government of Pedro Sánchez established the extraordinary tax on banks for the years 2023 and 2024 and which sought to raise 3,000 million euros, the ECB already published an opinion with serious warnings about the consequences of the tax, without preventing the advance of the tribute.
Calviño with the CNMC and the FCA in the United Kingdom
The difference between the profitability of deposits and the cost of mortgages has forced European governments to adopt different strategies. In Spain, the Minister of Economy and Digital Transformation, Nadia Calviño, announced that the National Competition Market Commission (CNMC) and the Bank of Spain will analyze this situation after she expressed her concern at the meeting she held with the bank employers of Spain and consumer associations last week.
In the United Kingdom, the FCA, the British financial authority, has met with the most relevant entities in the country to discuss transferring the rise in interest rates to products aimed at the most conservative savers after the Bank of England has raised interest rates to 5%.
