Germany’s banks are currently battling over their customers’ cash. But they’re not trying to lure them with attractive interest rates. Instead, they’re hoping to keep savers at bay with the least attractive offers possible.
Banks are at risk of drowning in deposits, as customers are parking more money than the banks are able to lend out. This is threatening not just a few institutions but the entire banking sector of Europe’s largest economy.
The consulting firm Barkow Consulting has calculated figures, exclusively for Handelsblatt, which show how dramatic the situation has become. The deposits from businesses and private savers totaled €2.317 trillion ($2.95 trillion) in May 2014, exceeding for the second time this year banks’ total credit volume.
This phenomenon has been known to happen with private customers, said the owner of the consulting firm, Peter Barkow. “But the fact that banks now are essentially being buried in cash holdings from corporate clients – that is very surprising,” he said.
There are several developments that could have caused this, one of which is the investment crisis brought about by the low interest rate policies of the European Central Bank, the ECB. Money is flowing out of other euro zone countries and into Germany. Despite the low rates, German private investors are stubbornly parking many billions of euros in current accounts.
Another reason is the trepidation corporate clients feel about making investments – for more than a year the demand for loans has been considerably below average. Instead, the companies are hoarding their cash in banks. Mr. Barkow has calculated that the “war chest” of German companies has since risen to €400 billion.
Before the financial crisis broke out in mid-2007, many banks escaped into the risky credit substitution business when they held too many deposits.
Companies, German savers, and also rich individuals from southern Europe are all amassing giant cash reserves – above all to be prepared for future crises. Germany’s once feared credit crunch seems so very far away.
The private investor crisis has been building for a long time. Many banks would long ago have started charging penalies for deposits if they didn’t hold onto the vague hope that average investors will eventually buy more lucrative products with their money. But most banks have stopped soliciting once coveted savers. “The yields on overnight deposits have already been negative for some time, so the banks in principle are paying money here,” said Mr. Barkow.
Corporate clients, by contrast, will have less room to maneuver should banks decide to charge for their desposits, too.
“While the private investors, if faced with penalty interest, would put their money in droves into a safe, corporate clients can’t do this, because of the high sums involved,” said Oliver Keine, a banking expert at the consulting firm SMP.
But the first corporate clients are already reporting penalty interest on deposits. “There are already banks, which are demanding penalty interest on deposits of up to three months,” Roland Pelka, chief financial officer of Hornbach Baumarkt, said recently at the presentation of the home improvement chain’s interim balance.
And what does this all mean for the banks? For them, this deposit glut is more of a curse than a blessing, because in the lending business there is almost nothing more to earn. If the banks were to park money at the ECB instead, they would first have to pay penalty interest of 0.2 percent. “The glut in deposits is – together with the current interest levels – now certainly the biggest burden by far on earnings for banks,” said Mr. Barkow.
Furthermore, before the global financial crisis broke out in mid-2007, many banks escaped into riskier loan businesses when they held too many deposits. But that is frowned upon these days.
“Most banks’ appetite for risk has considerably declined,” Mr. Keine said. However, the risk aversion is reflected in declining interest profits. Another problem is added to this: if the bank is holding safe, long-term bonds in its portfolio, it will normally have to write off the value of these bonds in the event of a turnaround in interest rates.
The most affected are Germany’s savings banks and cooperative banks, which, because of their thick network of branches, have high fixed costs. While Commerzbank and Deutsche Bank have the freedom to invest deposits as they see fit, many small regional banks, especially in rural areas, must traditionally invest a portion of the deposits in low-yielding securities. According to the German Association of Savings Banks (DSGV), savings banks have a liquidity surplus of €171 billion. For the cooperative banks that figure is about €100 billion.
Foreign subsidiaries are also suffering from this development. Online bank ING-DiBa has collected €112 billion in client deposits in Germany over the past 15 years, but given out €73 billion in loans. Ralph Hamers, chief executive of the Dutch parent company ING, would like to use the surplus for credit in other countries, but Germany’s financial regulator BaFin prohibits it. The federal regulator wants to prevent subsidiaries from passing on liquidity or equity to their foreign parent companies.
“We have a surplus in liquidity in Germany and Belgium,” said Mr. Hamers. “The European banking system is still very inefficient.”