As lenders refuse to pay up to hold on to some deposits, European savers are taking more of their money out of the banks in search of a better deal.
The phenomenon known as a “bank walk”—a slow but noticeable outflow of consumer cash—was shown in the findings of some of the largest lenders in the area, which also provided a peek at the trend.
When interest rates abruptly increased from an almost 15-year slumber to around zero last year, lenders wasted little time in raising loan rates, but most have been slow to raise deposit rates paid to millions of their customers.
This has increased profits at several large banks over many experts’ projections, but it has also displeased savers, generating new concerns about the sector’s long-term health.
According to Nicola Marinelli, assistant professor of finance at Regent’s University London, “Traditional banks need to decide whether to prioritize their liquidity and stability by increasing rates and retaining customers’ funds or to prioritize their return by keeping rates on deposits as low as possible.”
As long as there is significant inflation, money market funds are proven to be popular with savers looking for higher returns on their money.
The returns on these funds have recently barely outperformed the rates on bank deposits, although as of April 25, the Crane sterling-based Money Market Fund index posted a 7-day annualized yield of 4.10%, while some bank interest rates were still below 1%. The comparable amount in euros was 2.81%.
The most popular asset class in March according to data from Refinitiv Lipper was European money market funds, which saw net inflows of almost 34 billion euros ($37.6 billion).
Although it still pales in comparison to the 9.45 trillion euros held in current, or checking, accounts at banks throughout the eurozone, the fund class was already worth more than 1.4 trillion euros at the end of last year.
Additionally, between January 1 and April 26, Fidelity International reported an 8% increase year over year in inflows into money market funds on its investment platform.
STRONG LIQUIDITY
Senior bankers have downplayed the threat that smaller deposits provide in an area where consumer advocacy groups believe that spouses are more frequently left behind than banks.
When asked about a 1.6% drop in deposits in the first quarter, UniCredit CEO Andrea Orcel said the bank could afford to pursue profitability in managing its deposit base because it had such a strong liquidity position and a 163% coverage ratio.
As the demand for loans appears to be slowing, the wider decline in deposits may also help banks balance their liabilities—primarily what they owe depositors—against a future decline in their assets.
But in order to cover lending bets that might suddenly go south, lenders must also make sure they have enough liquidity and capital on hand.
The majority of banks boast liquidity and capital levels that exceed regulatory standards, but the failure of Silicon Valley Bank in the United States and Credit Suisse in Switzerland serve as cautionary tales about what might happen when borrowers abandon lenders more quickly.
WITHDRAWALS
In the first three months of the year in Britain, NatWest clients withdrew 11.1 billion pounds; HSBC’s deposits excluding one-time inflows fell by $10 billion to $1.6 trillion, while Barclays and Lloyds Banking Group had declines of 5 and 2.2 billion pounds, respectively.
According to Bundesbank data, household deposits in Germany fell by almost 8% from a year earlier. The largest bank in the nation, Deutsche Bank, partially attributed its own 4.7% decline in the first quarter to concerns that the banking crisis in the United States and Switzerland will spread to other countries.
James von Moltke, the chief financial officer, did acknowledge that there was increased competition as a result of “some price-sensitive deposits leaving the bank” and some customers switching to higher-yielding options such as money market funds.
While Spain’s Santander was the only European powerhouse to report an increase, it was a modest one of 6% over the first quarter, as did France’s BNP Paribas.
Banks have come under fire from some lawmakers for the disparity in interest rates they charge savers compared to what they charge borrowers.
“The topic is profitability. To protect your own earnings, that is. At a February hearing in the UK parliament, British lawmaker Angela Eagle questioned bank executives, “Is that not the answer?
While Andy Halford, chief financial officer at Standard Chartered, told reporters he believed people would ultimately prioritize security over interest payouts, HSBC CEO Noel Quinn described his bank’s deposit loss as “nothing significant.”
“We will see people putting their money where it is safe,” he said.
