The ECB pushes banks to raise deposits and narrow the gap with households in North America and Canada focus
The European Central Bank remains concerned about the low interest rates that euro area banks pay on household deposits. With wages under pressure, banks in several member countries have kept deposit rates at modest levels. Deputy Governor Luis de Guindos returned to the spotlight to urge banks to act and increase returns for individual savers, arguing that higher policy rates should be reflected across both loans and deposits. At a Deloitte and ABC conference, he highlighted how increases in rates affect the entire product line and urged banks to adjust the pricing of savings products accordingly.
Banks’ profits from households reach new highs
Guindos is not new to this message. The discussion returns to a moment in September of the previous year when the ECB began tightening policy for the first time in more than a decade. He stated that deposit rate increases should come through promptly. Christine Lagarde, then and now a leading voice at the ECB, has reinforced this stance in various European markets as part of a strategy to slow demand and cool inflation. The objective is to tighten credit conditions to curb spending, while offering savers better incentives to keep funds idle in banks instead of chasing other investments.
ECB urges customers to press for higher deposit rates
Spanish banks have drawn attention for paying comparatively low rates on deposits. The country accounts for a notable portion of euro area banks and has recently kept new deposit rates around the mid-twos for several months. The eurozone average has moved higher, but Spain still shows a small spread compared with the broader union. The difference between what banks pay on deposits and what households earn remains a key measure of competitiveness. In recent cycles, the deposit rate gap has shifted as the ECB tightened policy, influencing household finance and the overall cost of money in the economy.
Medium-term viability under scrutiny
Historically, the gap between new deposit rates in Spain and the euro area has varied. In earlier years the gap sometimes favored Spaniards when financing a real estate upswing or during periods of stronger credit conditions. The current environment has widened the disparity as Spanish businesses benefit from abundant liquidity while demand for credit remains moderate. This dynamic supports bank margins but raises questions about long-term sustainability if higher funding costs persist and demand for lending slows down.
Guindos warns about a possible mirage in banking profits
Guindos noted that the rise in savings product returns tends to lag behind increases in loans and suggested that the annual gains may not be sustainable. He cautioned about a potential mismatch between rising savings incentives and actual lending growth, warning that persistently higher financing costs, slower economic momentum, and uneven credit expansion across sectors could erode profits in the medium term. Banks are urged to monitor funding costs as deposits remain a key factor in the performance of financial institutions.
Profits trend under close watch
At present, major lenders in the region continue to show robust earnings. A group of significant banks reported a strong period of profitability, driven in part by higher interest income and a larger customer base. The adjusted margin benefited from a combination of rising loan volumes and selective increases in deposit yields, helping to lift quarterly profits despite broader economic headwinds. The balance between interest earned and paid on deposits remains a critical driver of cash flow and capital adequacy for these institutions.
The household role in treasury holdings
Household wallets hold a substantial portion of money in bank assets. A large share of these funds sits in ordinary savings accounts with modest returns. While term deposits can offer higher rates, the overall mix and the distribution of savings across different accounts influence how much households earn from their balances. Even amid rate hikes, the shift of savings into higher-yield products may be gradual, reflecting stickier behavior by savers who value liquidity and convenience. As deposits rise, banks balance balance sheets with a careful eye on funding costs, interest margins, and the path of inflation.