Last year, a remarkable commitment shaped the financial landscape as households, investors, and institutions received letters of deposit from banks. The money allocated to term deposits grew beyond expectations, while investments in government short-term securities increased at a notable pace. The earnings from specific banking products remained distinctly lower, even as families expanded their term deposit portfolios. As the euro strengthened from January to November, deposit growth surged to new highs, according to data released this week by the Bank of Spain.
Banks benefited from customers who already held funds within their institutions, often paired with minimal fees. Banks regularly roll out promotional offers throughout the year. A small uptick in profitability comes from directing more funds into deposits to counterbalance resource outflows. In parallel, households tended to preserve money in existing accounts, though a sizable portion, roughly three quarters of a million euros, migrated from current accounts to other products such as fixed income or investment funds, reducing the immediate impact of rising rates on savings. The dynamics point to a price response across the market. This interplay helps explain the movement in official rates as policy makers adjust to evolving liquidity and demand signals.
Public debt yields were able to react quickly in bond markets, even as bank deposit rates are driven by investor orders. In the auctions of November 2022, the Treasury offered interest ranges between 1.387 percent and 2.565 percent; the latest settlements showed similar patterns with modest shifts to higher levels around 3.58 percent and 3.747 percent. Banks adjusted new term deposit rates, moving from about 0.71 percent in November 2022 to roughly 2.57 percent in the same month a year later. Institutions managed these changes with a combination of their commercial leverage and high liquidity, aiming to balance income with risk exposure.
big difference
Despite the gap in profitability, households continued to place far more money with banks than in government debt. In November, bank letters reached 23.977 million units, up from October, and total deposits rose to 119.486 million, marking solid gains. With interest rate increases starting earlier in the year, household bond portfolios extended their lead over deposits through late 2022 and the early months of 2023. However, time deposits still attracted more fresh money than last year, suggesting a persistent preference for bank products as a stable savings vehicle. The shift in allocations toward public debt securities has become more noticeable since March of the previous year, reflecting changes in risk and return expectations across the saver landscape.
Moreover, the growth in families’ letter portfolios remains a defining trend, suggesting continued momentum in the near term. On one side, rate-sensitive segments show signs of moderation as markets anticipate ECB rate cuts later in the year. Data from recent auctions indicate that short-term rates can exceed longer maturities, a sign that investors expect lower price levels in the year ahead. On the other side, banks continue to raise deposit yields gradually, with more institutions running targeted campaigns or product offers. Yet the decline in Euribor, the key reference for many deposit products, limits how steeply these yields can rise in the near term. This evolving environment shapes household saving choices and bank profitability in a nuanced balance of risk, liquidity, and policy expectations (Bank of Spain).