Bank Money: Will the Interest Rate Switch Track Savers' Gains?
Have banks primarily maximized their profits via higher interest rates? Recent research by FMH-Finanzberatung, which has been providing independent interest rate information since 1986, delves into this question, presenting promising results.
In recent months, headlines like "Still zero interest rates at many banks." and "Banks are not passing on higher interest rates." have become more common. While the cost of building loans has escalated with each interest rate rise from the ECB, overnight interest rates at many banks remain modest.
Nevertheless, a study on overnight money by FMH-Finanzberatung conducted following successive rate hikes reveals that the banks' negative portrayal had, at least partly, been inflated. In an extensive evaluation, some banks' new customer offers during the key interest rate rise period were scrutinized---with promising findings.
Hesitant Beginnings
The inquiry also confirms banks' initial cautious response to these developments. With the ECB abolishing negative interest rates only at the beginning of July 2022 and setting the key interest rate (deposit rate) at 0.0%, fewer institutions felt the urge to market overnight money for new customers at that time.
The interest rate hikes that followed, however, posed a new challenge. ING began offering new customers an interest rate of 1% on call money in October 2022. Although the interest rate on deposits with the ECB still stood at 0.75%, the negative impact on ING was manageable due to the next increase to 1.5% on October 27, 2022. Consequently, ING benefited from a wave of new customer influx and set an example for the rest.
First one, then (almost) all
ING's initiative had a significant positive impact on savers and, subsequently, other banks. Offering better deals, especially for new customers, became essential. A few months later, ING once again made headlines with an interest rate of 2% (the ECB deposit rate at the time) and motivated online brokers.
Under this recurring cycle, the majority of new customer offers from the banks analyzed fell within or barely exceeded the respective ECB deposit rates, without losing touch with the top new customer offers.
Breathing Space until 2024
Already, some banks are targeting new customers with the offer of as much as 3.75% or even 4%. However, this interim relief is expected to persist until the ECB adjusts its key interest rates if the hoped-for decline in inflation does not materialize.
Meanwhile, the current trend in banks that offer uniform interest rates to both new and existing customers offers some respite to the latter. Dissatisfied with the 1.25% or lower interest offered to long-term clients, savers are once again evaluating their options with an eye for better opportunities.
Banks that differentiate interest rates between new and existing customers are reaping the benefits. Long-term yield-oriented investors are optimistic that they will fare better with consolidated interest banks than with those that only entice new customers with attractive interest rates.
Profits on the one hand, losses on the other
Adapting their interest rate strategies has proven beneficial for banks that have gradually raised interest rates. While they may have lost visibility and trust from some dejected customers, their economic benefits cannot be underestimated.
By contrast, banks that leveraged the new customer market more decisively gained publicity, local customer attention, and higher interest differentials below the ECB deposit rates. They profited from the subsequent ECB rate hikes and their increased client base.
More insights about this overnight money study can be obtained here.
- The recent observation that banks have failed to transfer higher interest rates to their consumers with regard to call money and savings accounts may be exaggerated.
- While banks initially proceeded with caution following the abolition of negative interest rates by the ECB, a wave of new customer offers ensued as the competition intensified.
- Both slow and fast moving banks have seen varying financial gains following the ECB's interest rate adjustments: Banks that have taken their time to raise interest rates have posted profits while those who entered the new customer market early have enjoyed higher interest differentials and benefited from the relationships built with new clients.
- The ECB's interest rate strategy has primarily influenced bank deposits and loan rates, with potential effects on intermediary organizations and ultimately impacting the broader economy.
Enrichment Data:
- The European Central Bank (ECB) has never imposed interest rate hikes on call money and savings accounts directly. Instead, ECB adjustments have influenced the interest rate environment, impacting banks and savers by way of altering depository interest rates and lending policies.
- ECB's key interest rates, including deposit facility rates and lending facility rates, have historically been used to regulate inflation and bolster economic growth. However, lowering these rates can make depositing money less appealing and potentially trigger instability in banking systems.
- Banks are incentivized to lend more freely when ECB sets negative interest rates, as they are charged to hold their deposits at the central bank. This policy aims to stimulate lending activity and economic growth.
- Savers may be less inclined to deposit their money in banks due to negative interest rates, reducing the total amount of cash deposits and causing potential challenges for banks' liquidity and their ability to meet loan obligations.
- The ECB seeks to balance the potential impact of its interest rate adjustments, as lowering interest rates can stimulate the economy while also posing risks related to reduced population savings and instability within banking systems.
