New European interest rate analysis: Pandemic sends corporate rates reeling
Europe has begun opening back up following extensive lockdowns to control the Covid-19 pandemic but, according to most analyses including that of German chancellor Angela Merkel, the continent has a long way to go on the road to recovery. The most powerful political players in Europe, Merkel and France’s Emmanuel Macron, joined the interventionist side along with the European Central Bank, making the case for strong measures to support the EU’s harder hit economies, despite protest from among the German conservatives and free market liberals. The ECB’s chief economist Philip Lane argued that the central bank’s steps thus far, including “PEPP; refinancing operations; collateral-easing measures,” have contributed to the EU’s stabilisation (PEPP referring to the pandemic emergency purchasing programme).
New Raisin research:
Cash glut at largest financial institutions drives rates down
Top 1-year interest rates on deposits in Germany, the Netherlands, Portugal, Denmark, and as far east as Romania are between 0.57% and 0.97%, while 1-year deposits at those countries’ largest banks all offer rates under 0.05%, according to Raisin’s new research.
Rates on 1-year deposits at the biggest financial institutions in Spain, Belgium, Austria, and Ireland are hovering around 0.1%.
What’s driving the interest rate spread in European banking
The European Central Bank’s deposit rate currently stands at -0.50%. Banks are required to hold funds in reserve with the ECB to cover withdrawals by their customers. They generally deposit much more than the mandatory amount, however, and pay the penalty. The ECB’s interest rate is seen as a tool: by pushing down the cost of credit and making banks pay when they hold onto cash rather than lend it, the central bank intends to stimulate lending, investing and other economic activity. But at the moment many of the biggest banks simply have too much cash and are either reluctant to use it on lending or aren’t experiencing enough demand.
Smaller banks don’t have this problem, rather tending to need to attract more customers to build up their liquidity, to meet local and regional demand for loans. So small to mid-sized banks often offer more lucrative interest rates, and a gap develops between interest rates at the biggest banks and small to mid-sized institutions. For consumers the more profitable alternatives don’t involve greater risk, since all of their deposits are covered by the European deposit guarantee guidelines in each country.
Consumers in most of Europe can find higher rates if they search
The spread between interest rates at the largest banks and top available rates especially stands out in Germany, the Netherlands, Portugal and Denmark. Consumers in Spain and Italy, though, as well as Belgium, Austria and Sweden, cannot count on the big familiar banks in their markets if they want to earn any yield on their term deposits.
In the UK the ratio is just 2:1, one of the narrowest, and yet the difference for consumers is still a matter of earning twice as much interest by shifting money into top offers. Only in Ireland, when Raisin’s 1-year offers are excluded (currently up to 13 times higher than the average rates at the big banks), the ‘top offers’ have sunk lower than the biggest banks’ offers.
