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Febelfin reacts with disbelief to the idea of ​​taking legal initiatives to raise savings interest

Stay up to date with the latest measures from the financial sector

21 May 2023 - 6 min Reading time

A few months ago, the European Central Bank (ECB) decided to systematically raise the deposit rate in order to curb inflation. The deposit rate is the interest that banks receive when they deposit their excess savings with the ECB. As a result, many banks have decided in recent months to increase the savings interest on regulated savings accounts. Each bank takes that decision individually on the basis of a risk analysis and in line with its commercial policy.

 

The banking sector plays an important social role in the financing of individuals, companies and government in Belgium. Each bank has a different business model and must carry out its own risk analysis and estimate which savings interest rate it can offer. An ill-considered intervention by the government in the delicate mechanism of bank refinancing could seriously undermine the stability of the banking sector.

After all, the interest on savings is not solely determined by the deposit rate of the ECB. We should not forget that we are coming out of a long period of low interest rates, during which the ECB's deposit rate was even negative. Some factors that come into play:

  • For years (between June 2014 and July 2022), the banks were confronted with a negative deposit rate at the ECB, meaning that they had to pay to place their deposits, while in Belgium the minimum interest rate of 0.11% has always continued to apply. It concerns a period of 10 years during which this minimum interest rate was higher than the key interest rate of the ECB. Belgian savers have therefore never known zero or negative interest on regulated savings accounts, unlike many other European savers.
  • The amount of interest on savings that a bank can pay is largely determined by the interest that it itself receives on its outstanding credit and bond portfolio. A long period of low interest rates also means that the home loans have been granted for years at particularly low interest rates. A savings interest is determined in the short term, but a home loan has an average term of 20 years. The borrowers, who opted for a fixed interest rate, will therefore be able to enjoy a low interest rate for a period of 20 years. Belgium is one of the few countries in Europe where so many fixed-interest loans (over the last 13 years, fixed-interest loans have almost systematically accounted for more than 70% of total production) are granted for such a long term. A system that contributes to financial stability for the borrower because it is not subject to the rise in interest rates. Banks must therefore take interest rate risk into account in their long-term risk analyzes much more than in other countries.
  • Moreover, it is not correct to compare the interest rates on short-term savings directly with the interest rates on the recent production of long-term home and business loans. After all, the rising interest rate is applied to the entire portfolio of regulated savings deposits, while this does not apply to the loan portfolio. The vast majority of the current home loan portfolio originates from the 10-year period in which low interest rates applied (new production and a major refinancing wave in 2015-2016). For long-term residential and business loans, the higher interest rate is only applied to the new loans granted. In concrete terms, the interest rates on the savings account are applied to large volumes (EUR 294 billion in regulated savings deposits), while new credit production has remained limited and has declined over the past period, partly due to the policy pursued by the ECB (EUR 7.2 billion new production since October 2022). The higher interest rates on new credit production are therefore limited in volume, compared to the large volume of outstanding savings deposits in Belgium. To put it in concrete terms: there are approximately 300 billion regulated deposits, every 10 basis point increase in interest rates on savings costs the sector almost 300 million euros. An increase of 100 basis points, 1%, on savings deposits costs the sector 3 billion euros.
  • Bank taxes in Belgium are particularly high and are also determined on the basis of savings. This applies to both the special bank levies (JTK) and the recently increased deposit guarantee contribution. Together these amount to 24 basis points, and this will increase to 31 basis points in 2025. These amounts go to the budget, and thus benefit the government. Since the taxes are levied on savings, these government levies are creamed off directly from the savers  instead of being paid by the banks to the savers. Moreover, these contributions were recently increased by the government during the last two budget rounds. For the DGS contributions, it was decided to raise them to a level of 1.8% of covered deposits in Belgium, while in Europe the target is 0.8%.
  • On top of the Belgian bank levies, the banks also pay 14 basis points as a contribution to the so-called Single Resolution Fund (SRF). This brings us to a total contribution of 38 basis points at the moment.

Stability of the banking sector is essential

 

Each bank has a different business model and in view of the above factors, it is important that each bank can make a correct assessment of the savings interest rate it can offer, taking into account the necessary long-term risk analyses. Carelessly limiting the ability of banks to carry out this risk analysis themselves and to estimate what interest rates on savings can be offered in order to achieve the right balance between the short and long term is counterproductive and has a far-reaching effect on the stability of the banking sector. Any legal initiatives to determine the minimum interest rate on savings are not only far-reaching interference from the government in the market, but will also affect the role that banks can play in the economy. It also demonstrates a lack of consistency in government policy to significantly increase the contributions to the banks' deposits for the budget - and therefore for itself - and, on the other hand, to ask the banks to offer more interest on savings to their customers.

We benefit from a strong and solid banking sector that is resistant to shocks and that can serve the needs of households, businesses and the government as much as possible. The turbulence in the US financial sector further underlines the importance of having a healthy banking sector. In recent years, European and Belgian banks in particular have significantly strengthened both their capital and liquidity positions. Both are built from the profitability of the financial institutions. As the recent banking crisis in the United States has shown, it is very important that banks maintain a strong liquidity buffer in order to be able to meet withdrawals from their depositors at all times. These liquidity buffers are held in cash at the ECB, including as legal reserves, without being remunerated.

During and after the Covid health crisis and the recent Ukraine crisis, banks have gone beyond their role in providing financial support to families and businesses in need. This help was always made possible from the strong capital and liquidity buffers of the financial institutions. Even now we are faced with many challenges, such as the necessary transition to a more sustainable society, in which the banking sector wants to be a partner of the government and society. A role that she can only play if she is sufficiently strong and robust herself. It is time for the government to really consider us as a partner and not underestimate the social role that the banks play, in the interest of families, companies and government.

Febelfin therefore calls on the government to reflect thoroughly on the impact of any legal initiatives on the Belgian banking sector, and by extension the entire Belgian economy.

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