LONDON, Aug 10 (Reuters Breakingviews) – Banks are reaping the rewards of higher interest rates. That is the opinion of the regulators and politicians in Britain, where the Financial Conduct Authority (FCA) has devised a 14 point plan make lenders like Barclays (BARC.L) and Lloyds banking group (LLOY.L) give savers juicier returns on their cash. But a comparison with Spain suggests that concern is overblown.
Between January 2022 and May 2023, the Bank of England raised rates by 4.25 percentage points. The UK’s nine largest banks increased interest on easy access savings accounts by 1.18 percentage points, according to the FCA. found. In other words, they passed on only 28% of the increase to customers. Last month, the FCA called on banks to push savers into higher interest accounts. More measures will be needed if improvement does not occur. Some governments have already gone further: Italy on Monday Announced a tax on banks’ extraordinary profits, following similar measures adopted by Spain and Hungary.
However, it is unlikely that additional measures will be necessary. This is because banks no longer have excess deposits, which was a feature of the Covid-era economy. The result is that they will have to bid more aggressively to obtain financing in the future, for example by increasing interest rates on savings accounts.
Take NatWest (NWG.L), the £20bn state-backed group. Its second-quarter results showed that loans are now equal to 86% of total deposits, roughly at pre-pandemic levels, compared with 75% in 2021. This so-called loan-to-deposit ratio is the main way banks They judge whether you need additional financing. A higher number implies that they may want to seek more consumer cash.
The ratio is also rising rapidly for Barclays’ British unit. Lloyds, with its loans-to-deposits ratio still well below its pre-pandemic level, is a relative outlier. But that may be partly because its loans have grown so slowly. Second-quarter results suggest you’re also paying more for financing: Interest expenses nearly doubled between the second half of 2022 and the first half of 2023.
Compare that with Spain. CaixaBank’s national subsidiaries (CABK.MC)Santander Bank (SAN.MC) and Banco Bilbao Vizcaya Argentaria (BBVA.MC) all have significantly lower loan-to-deposit ratios than before the pandemic, implying they have surplus funds. One possible reason is that the European Central Bank is reducing its balance sheet more slowly than the Bank of England, meaning there is still much more excess cash circulating in the euro zone financial system than in Britain. Abundant liquidity means banks do not have to compete as fiercely for funding as deposits.
The ECB has also raised rates to lower levels than the Bank of England, meaning Spanish savers have less incentive to shop around for the best rewards. In any case, it follows that Spanish banks do not have to compete aggressively to attract customer money.
The conclusion is that market forces are on the side of Spanish banks and against their savers, while the opposite is true in Britain. That’s good news for the FCA, even if it means the watchdog’s action plan is ultimately unnecessary.
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
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Britain’s banks and building societies have until the end of August to justify to regulators why some of their savings rates are low, the Financial Conduct Authority (FCA) said on July 31.
While the sector has been rapidly passing on higher interest rates to mortgage customers, lawmakers have criticized lenders for failing to increase savings rates worth around £1.5 trillion ($1.9 trillion ) at a similar rate.
The FCA set out an action plan to enforce a new obligation to customers after its review found that nine of the largest savings providers, on average, passed on just 28% of Bank of England rate rises to easily accessible deposits between January 2022 and May of this year. .
The nine companies (Lloyds Banking Group, HSBC, NatWest, Santander UK, Barclays, Nationwide Building Society, TSB Bank, Virgin Money UK and Co-operative Bank) transferred 51% to notice and fixed-term deposits during the same period.
Editing by George Hay and Streisand Neto
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