Banking retail deposits in Belgium
Belgians saved 16,5% of their disposable income in 2011, one of the highest percentages in the EU. The level of deposits – more than EUR 270 bn – reached all-time heights. Households flocked to certainty due to the crisis, ignoring negative returns. But is household behavior the only explanation of this evolution? We don't think so. Deposits have become more than ever the central pawn on the political checkerboard of governments and bankers alike.
Merely a riot, not a war for deposits
Deposits fulfill 3 crucial roles for banks. They are first of all a source of funding, enabling banks to meet the stringent Basel III capital requirements. Close to 60% of the liabilities side of Belgian bank's balance sheet come from deposits, a level similar to German banks and slightly above the Euro-zone average. Attracting and retaining sufficiently high deposit levels is more than ever a board-level topic.
Deposits are secondly also a source of income. Interest income represents about half of Belgian banks' income. Access to deposits is thus crucial for their long-term profitability.
Thirdly, deposit products are a spearhead in the battle to win new clients. People seldomly change banks altogether, but there's a clear trend to buy products from other banks than the home banker. Saving products are ideal teasers and a stepping stone for cross-selling in other areas.
Despite deposits' increased strategic importance, there has not been a full-scale war for deposits. The word 'riot' would probably more accurately reflect the market dynamics of the last 2 to 3 years and this despite the very high loan-to-deposit ratios of some banks. The reason is the visible hand of government, working in tacit agreement with the banks.
A snake biting its own tail
There is a forced, symbiotic relationship between governments and banks in the deposit domain, comparable to a snake biting its own tail. Western European governments – including Belgium – need capital to fund their deficits, a result of their incapacity to adjust spending levels to their impoverished status in the new world order. Banks provide this capital by buying government bonds. Governments, in turn, assist banks to raise this capital on the market at a low cost. In Belgium this is achieved by creating fiscal exemptions and by limiting competition via a maximum interest rate in the domain of regulated savings products. This symbiotic relationship has been in place for many years.
The sovereign debt crisis has, however, changed the game. As a result of the market's motion of distrust against the governments, government bonds plummeted and banks could no longer meet the capital requirements, enforced by these same governments. Since the market was not prepared to refinance the banks, the government had to play its role of lender of last resort. This creates a situation where governments guarantee banks which themselves provide loans to these same governments. They have handcuffed each other in a mutually interdependent relationship as Siamese twins.
This increasing interdependency is witnessed by the fact that banks have started to clearly favor their own country's bonds to the detriment of other countries', thereby de facto nationalizing state deficits. Looking at the other side of the same coin, one could say that governments increasingly domesticate national savings. Neither of the 2 parties has an interest in a war for deposits. One can even argue that the citizen in general hasn't either. The cost of a bank crisis is much higher than the missed return on his deposits.
Three scenarios for the future
In the first scenario, the Euro-zone disintegrates and a Northern bloc of loosely coupled countries having similar economic cycles and budgetary discipline remains (among others Germany, the Netherlands and Belgium). The biggest challenge for the Northern bloc in this scenario is to find a replacement for its export driven economic model. The peripheral European countries will not be able to buy expensive imports any more and economic growth is likely to stay subdued. Market interest rates will remain low, but one can nevertheless expect a tendency towards an outflow of savings from the deposit market to alternative investments due to a new perception of economic stability.
[question: would Southern European banks in this scenario try to raise deposits in the Northern Euro bloc?]
This scenario would represent a real challenge to banks' deposit strategy makers. At the one hand, Basel III requirements will necessitate a high deposit volume. To retain the deposits, higher rates must be offered. At the other hand, economic growth would be subdued, limiting the number of good investment opportunities for banks. Consequently, this would put tremendous pressure on interest income. We believe this scenario would boost product innovation with new product characteristics to attract customers. A bewildering product choice, similar to the telco industry, and a lack of transparency will become the norm. A war for deposits is most likely in this scenario.
In the second scenario (most of) the Euro-zone countries agree to fundamentally reform the union, closing the initial design gaps and achieving deep integration. Euro-bonds become the main debt instrument for governments. Economic growth returns and market interest rates will need to increase to damp the risks of inflation.
Despite the raising interest rates, an outflow of savings towards alternatives is to be expected. As a consequence of this scenario, the role of deposits as a source of funding is replaced to some extent by the new Euro-bonds.
In the third scenario, the Euro-zone stays intact as a result of lukewarm, ad-hoc initiatives in response to market threats. The stability and credibility of individual countries and of the Union are continuously challenged, resulting in political and social unrest without precedent. The value of sovereign debt is volatile as never before. A period of economic depression is the consequence. Deposit levels increase to unseen levels, despite negative returns. The ECB looses its independence and is used by governments as a political instrument.
In this scenario, households will continue to consider deposits as a safe haven, without alternatives. Banks will only be able to offer marginally higher rates than the market rates, because they are unable to transform the deposits into profitable asset-based business.
Kasper Peters (main author), Gregoire Tondreau and Bruno Colmant
