The pricing policy of the banks comes under the microscope of the Competition Commission (EA) again, a few months after the compromise between the two sides on the issue of commissions.
It was late 2019 when dozens of officers of the independent authority raided the management offices of the country’s largest credit institutions, as part of an investigation into concerted practices in terms of fees they imposed on their customers. The case was closed four years later, after a compromise, which provided for fines amounting to 42 million euros and a simultaneous reduction in charges for cash withdrawals from third-party ATMs, i.e. outside the network of each group. It did not take long, however, for the banks to come back under control. This time for the interest rates which offer to depositors.
As EA announced a few days ago, its services will examine at a sectoral level the observed maintenance at low levels compared to the European average. In particular, he considers that the increases in the ECB’s intervention indicators were passed on to a small extent to Greek depositors. In this context, any distortions in competition will be investigated, with the aim of submitting proposals for the benefit of savers by the end of 2024.
The lag
The truth is that euro interest rates rose from July 2022 to September 2023 cumulatively by 450 basis points. In the same period, the weighted average interest rate on term accounts with a term of up to 1 year, from 0.13%, increased by 160 basis points to 1.73% for individuals and from 0.05% to 2.85% for businesses (up 280 basis points).
The corresponding interest rates in May of this year were higher, at 1.83% and 3.18% respectively, despite the fact that the cost of money in the Eurozone fell in the interim, due to the imminent start of monetary policy easing in the Eurozone.
In the same period, the average interest rate for all European banks was 3.11% for individuals and 3.64% for legal entities. Therefore, a substantial lag is basically observed only among individuals (128 basis points). On the other hand, in businesses, the difference is limited, as it does not exceed 46 basis points.
The arguments
Banking sources who were asked to comment on these discrepancies noted that the approach to their interpretation should be multifactorial. They admit that competition in Greece is limited, due to the concentration of the market in four schemes after the outbreak of the crisis, but note that the interest rates between their products differ, depending on the type of clientele that each group targets. As for the differences with the eurozone, they emphasize that it is interpreted by the following:
- Deposit base composition: In Greece, 70% of deposits come from retail customers with a small average balance, compared to 60% in the euro area. The lower amounts not only earn worse returns on fixed-term products, but are primarily used for day-to-day trading. So they are placed for the most part in open demand accounts, where the interest rates are zero. According to data from the Bank of Greece, out of the 145 billion euros of private savings, only 37 billion euros, i.e. 25%, are in term deposits.
- Loan-to-deposit ratio: Greek banks, after the consolidation of their balance sheets, saw their loan portfolios shrink significantly. As a result, today loans represent only 60% of deposits. That is, they have excess liquidity and have no incentive to raise interest rates to attract depositors. The corresponding index in the eurozone is 100% and the relative needs are higher.
- Borrowing Cost: Domestic credit institutions are charged higher interest rates than international capital markets. In particular, they pay about 200 basis points above the European average for issuing bonds. So maintaining lower deposit rates covers part of this extra cost, while helping to offer cheaper loans to the public.
- Credit risk: There is also a greater burden on Greek banks from the higher cost of credit risk, as a result of the crisis that hit the Greek economy. In addition, in Greece the size of businesses is clearly smaller, which has a negative effect on the creditworthiness of the borrowers, and thus on the risk they take when financing them.
Banks: “Interest savings went to subsidies and borrowing costs”
General manager of a systemic group argues that if deposit rates were not lower in Greece, the cost of financing households and businesses would be significantly higher today. “By saving on interest we are able to offer more competitive pricing to those we lend to in today’s expensive money environment,” the same source said.
Typical are the findings of a recent study by the Bank of Greece, according to which the cost of borrowing in the domestic market is estimated to be approximately 90 basis points lower than what it would be in the scenario that banks increased deposit yields to the same extent as other European.
Besides, as the data show, at the moment the average fixed interest rate for housing loans for up to 5 years in Greece is lower than the European average (3.57% versus 4%). In businesses, the weighted average interest rate on new loans in Greece last May was 4.96%, compared to 5% in the eurozone.
Finally, the same source notes that the lower interest costs on deposits contributed to the freezing of floating interest rates on mortgage loans, which has been in force since May 2023 and will last until the summer of 2025. It is recalled that the banks after an agreement with the government they have imposed a ceiling on the reference interest rates (euribor, ECB), to which the specific grants are linked. Without it, interest rates would be 100 basis points higher today.
“If you consider that the average deposit balance of a household is around 5,000 euros and the average balance of a mortgage loan is 50,000 euros, this measure directly has the greatest positive contribution to the family budget of Greeks in the period of increased interest rates and inflation” he argues relatively the same strain.
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