The increasing cost of basic products for our day to day has notoriously affected a large part of the Spanish population. And not only the high cost of these items has greatly harmed the public, but also the rise in interest rates, which translates into a rise in mortgage payments. And this despite the fact that the Spanish banks have not transferred the entire increase and continue to maintain, as they have been doing for a long time, the mortgage at a lower cost than the European average.
In our country, according to the Financial Survey of families published by the Bank of Spain, the representation of mortgaged families reaches 28% and 96% of Spaniards have a deposit with an average of 28,000 euros. In order to protect the citizen, especially those who face the greatest difficulties in the context of the current crisis, banks are taking measures to face this situation of economic uncertainty and help alleviate the added difficulties that families are encountering in this context.
The sector as a whole is implementing a series of actions in order to meet the needs of those most susceptible to suffering at this juncture. For example, customers with the greatest difficulties can take advantage of the Code of Good Practice for vulnerable mortgage debtors. Depending on different criteria, they can extend the term to repay the credit by up to 40 years, freeze the installments for one year or take advantage of grace periods.
Clients can take advantage of the Code of Good Practices for vulnerable mortgage debtors
Solve all your doubts about the procedure of banks in this type of context with this resolution of frequently asked questions.
Is it true that banks earn a lot when interest rates rise?
A bank channels the money that savers deposit in their accounts towards the credit demanded by those who want to invest in housing, in goods or in the development of their businesses. Despite what one may think, the difference between what you pay for deposits and what you charge for loans does not really represent the entity’s margin. There are many factors that reduce it, such as capital buffers that must be met by regulation, personnel costs, maintenance of distribution channels, marketing, and product design that must be continually adapted to customer needs. , provisions to deal with defaults, etc. In fact, banking margins are much lower than those of most other sectors.
A rise in rates does not imply that the banks’ margin increases, but rather it also depends on the impact of this rise in rates on the payment capacity and the demand for credit from families and companies, the weight of fixed-rate loans or at a variable rate, the average term of credits and deposits, the cost for the bank to remunerate the deposits and the cost for the banks of the debt that they have to request in the markets to attract financing.
In a context of negative rates like the one we have experienced in recent years, it is very difficult for the banking business to be profitable, but a rapid rise like the current one is difficult for companies and families to digest and, therefore, greatly influences demand of credit and in the capacity of all to face the debts. Banks also find it more difficult to finance themselves and it prevents them from recovering the profitability they have lost for so many years operating at ultra-low or even negative rates. The benefit in Spain of the entities continues to be 23% lower than it was before the financial crisis.
Why do interest rates go up so much?
Interest rates are set by central banks whose main objective is to combat inflation. Persistently high inflation is much more damaging to businesses and families than a period of economic cooling off, and that is why central banks have been so forceful with the current rise. Banks not only do not set interest rates, but have greatly reduced their margins so as not to pass on the entire rise in rates to customers. Proof of this is that what a bank charges for a mortgage in Spain is little more than the interest rate of the ten-year bond, while in other European countries that differential is much higher.
Why are banks not remunerating deposits?
Spanish banks have excess liquidity compared to other European entities, which is why many entities are directing clients towards more profitable alternative funds, such as investment, public debt, etc. The data shows that the volume of investment funds and public debt in the hands of families is at all-time highs. He has also warned a lot about the early repayment of mortgages.
Why are there entities that pay and others that do not?
It is true that in Spain there are entities that are offering deposits with returns even above 5%. Competition in Spain is very strong and clients have full freedom to move their savings between entities. Some entities have very active deposit strategies, while others are more competitive in loans or offer other alternative savings products to their clients.
Why do many banks continue without paying for deposits and yet have made loans more expensive?
Commercial banks are transmitters of the policy that central banks decide. The reason why Spanish banks pay slightly less than banks in other countries is because they have a more comfortable liquidity position and do not need to attract deposits to have liquidity. Where they are competing a lot is in offering better returns on other products that may be more profitable for their clients, such as investment funds, insurance, etc. On the other hand, it cannot be forgotten that the opposite has occurred for several years in which, with negative rates, retail customers were not charged for deposits in Spain, something that was done in other European countries. In addition, the truth is that they are not transferring all the rise in interest rates to the price of credits so quickly. In fact, according to data from the Bank of Spain, the price of credit in Spain is below that of the euro area. In April, Spanish banks were the fifth cheapest in Europe for household loans and the fourth cheapest for business loans. For companies, for example, the average in Spain is 3.9% compared to 4.2% in the euro zone. Spanish banks have always been known for offering loans at very competitive prices, which has allowed, for example, access to the mortgage market for many segments of the population.
What are banks doing to help the most vulnerable customers to mitigate the impact of inflation and rising rates?
In Spain, banks have implemented measures to help customers who are in a situation of vulnerability to reduce this situation. For example, customers who are subject to the Code of Good Practices for vulnerable mortgage debtors, who have an income below a grace period of up to 5 years at Euribor-0.10%. Another measure, for households with income between 25,200 and 29,400 euros and in which the monthly mortgage payment represents at least 30% of income, consists of freezing payments for up to 12 months and extending the term of amortization 7 years.
There are banks that earn a lot of money, couldn’t they allocate those profits to remunerate deposits?
As in all sectors, the benefits have a specific destination. Almost a third is used to pay taxes, a third to remunerate the shareholders, who are the owners of the entity and who risk their money investing in it, and the other third is used to accumulate the necessary capital to be able to continue developing its main function, which is to finance companies and families. The better the banks are, the better they can fulfill their function of providing credit and sustaining the growth of the economy.
We have seen examples of turmoil at some regional banks in the US and Switzerland with Credit Suisse. Can something similar happen to Spanish banks?
Spanish banks are very solvent. It is highly diversified and has a solid and simple business model, focused on meeting the financial needs of companies and families. The affected American banks had an exorbitant growth with an activity concentrated in very few clients, a very deficient management and a much weaker supervision than there is in Europe. Spanish banking stands out in risk management, is efficient and profitable: three key variables to maintain customer confidence, something that has failed in the case of American banks. Without trust, the banking business is unsustainable.
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