Poor EU Bank Yields despite Heightened Risk
New EU rules for dealing with bank failures are still not implemented leaving the position of uninsured depositors (bank balances over €100,000) uncertain.
Unlike the US and Switzerland, dealing with problems in the banking system is more intricate in the EU where the collective action of 27 governments is required.
A framework for EU bank resolution has still not yet been implemented despite the bank failures elsewhere. Draft legislation to block the loophole deployed by Italy in 2017 to inject taxpayer funds into Banca Monte dei Paschi di Siena is being finalised.
The EU created a Single Resolution Board in 2015 to seek to avoid the use of taxpayer funds in a bank bailout scenario.
New ECB statistics published in June 2023 provide further confirmation that Euro-zone banks are not passing on the benefits of higher interest yields to their customers despite the absence of a Bank Resolution Framework.
The effective interest rate on overnight corporate deposits for April 2023 has climbed to a paltry 0.09% despite the ECB rate increases.
The figures show that term deposit rates for new deposits from corporations are improving but that hides a very poor return from existing term deposits.
ECB April 2023 Statistics Summary
Chart 1: Bank interest rates on new loans to, and deposits from, euro area corporations (percentages per annum)
“Composite cost-of-borrowing indicator for new loans to corporations increased by 16 basis points to 4.38%, driven by interest rate effect;”
“Composite interest rate for new deposits with agreed maturity from corporations increased by 22 basis points to 2.80% in April 2023, driven by the interest rate effect.”
“interest rate for overnight deposits from corporations broadly unchanged at 0.44%.”
With most corporates achieving no return on current account funds, the opportunity cost of bank funds is growing. The lesson for Finance Leaders is to pay much more attention to banking relationships to ensure that with the huge interest rate changes – they continue to be fit for purpose.
Many corporates are using Bankhawk’s Banking Optimisation Benchmarking to optimise their banking relationships and the return on their cash.