Greater pressure on households as ECB policy tightens
Fast and strong rate hikes are driven by an ECB that has shifted its fight against inflation onto households. The consequence is a heavier burden on families across Europe, with higher living costs and rising loan payments. In August, the most recent month with complete data, households in Spain paid banks an additional 1.119 million euros in interest on loans. This comes after December 2021, when the monetary authority signaled the end of net asset purchases and began tightening monetary policy. Savings accounts, deposits, and similar traditional saving instruments offered only modest relief, increasing by about 192 million euros according to data from the Bank of Spain.
As a result, lenders have passed on rate increases to loans more quickly than to deposits. Pablo Hernández de Cos, head of the supervisory body, noted that Euribor rose only partially in the cost of deposits offered by retailers in Spain, despite the overall tightening of policy in recent weeks. Euribor climbed from its December 2021 low to reach 4.073 percent by August. Meanwhile, the average rate on deposits with longer maturities rose by less than a third of a percentage point, standing at 1.377 percent.
The most striking figure is the composition of household assets. About 90 percent of the money households hold in bank accounts sits in deposits that carried very low interest rates. The average interest rate on these accounts rose only marginally to around 0.127 percent. In prior cycles, savings were distributed more evenly among term deposits and checking accounts, but in this cycle banks paid much less interest on savings despite higher loan costs. This has meant greater pressure on family finances as the balance shifts toward loan servicing rather than earning on savings.
Increased customer profitability for banks
During the same period, the average mortgage rate intensified as 74 percent of family borrowing is made up of loans secured by property. Mortgage rates rose by about 2.3 percentage points, reaching 3.436 percent, while other types of credit rose by roughly a full percentage point to around 6.94 percent. Consequently, monthly interest spending for a typical household climbed to 1.119 billion euros in August, compared with 1.343 million in December 2021 and 2.462 million in August. In contrast, interest income from deposits and accounts rose only modestly, by about 192 million euros, with total deposits amounting to around 206 million. This widened the banks’ overall margin to roughly 927 million euros, an improvement of about 69 percent year over year.
Bank of Spain projections show that loan interest payments started eroding gross disposable income by the end of 2021. The share of households affected grew through 2022 and continued to increase into 2023, with the impact translating into a small but persistent drag on yearly disposable income. The trend in deposits did begin to compensate some losses in January 2023, and by August the overall effect on gross annual income rose by about 0.3 percentage points.
Customer profitability rises, but at a cost to savers
The uneven pace of rate changes between loans and deposits largely explains the current profitability gap. Bank earnings from January to June grew by 44 percent from the previous year and 62 percent compared with the first half of 2021, totaling around 12.608 million. This positive margin stems from the gap between the rate charged on lending and the rate paid on savings, a gap that remains essential for banks to remain profitable. When the gap widens, banks attract more income from borrowers as long as the funding remains cheap and abundant, supporting higher returns on average balances.
Tightened ECB policy also contributed to higher monthly payments for new loans as the price of credit rose in line with Euribor movements. At the same time, the lending market showed slower growth in deposits in light of abundant liquidity and still-reduced credit demand. Consultants at Alvarez & Marsal noted that the margin for major banks in Spain rose from 1.79 percent to about 2.5 percent by June, driven by a larger increase in the average rate charged to borrowers than the rise in the average rate paid on deposits. Senior director Eduardo Areilza suggested this peak could flatten somewhat in subsequent quarters, with projections landing the margin somewhere between 2.2 and 2.5 percent. The key driver remains the volume of current accounts turning into deposits during the period. If savings remain at 35 to 50 percent of total household assets, the benefits to banking results will become even more pronounced.