Editor’s note: This article was first published in January 2013; the proposed caps on Spanish deposit rates, the debate around them and the competition authority’s review were current then and may have changed. The CNC was merged into the CNMC later in 2013.
Things are going from bad to worse for savers in Spain who don’t want to take risks with their money, because leaving money idle in a bank account is itself a risk of losing purchasing power, owing to factors such as inflation and steep rises in bank fees. According to ADICAE (a Spanish association of bank customers), those fees have risen by as much as 25% at some banks, and charges for certain banking services have gone up by more than 35%.
Until now, savers who are afraid of risk had only two investments we could consider safe: fixed-term deposits and sovereign debt. The first is no longer an investment option: with the cap that is planned on deposit returns, 1.75% for 12 months, 2.25% for between 1 and 2 years and 2.75% for deposits of more than 2 years, savers will lose money. If this measure takes effect, deposits would no longer be an investment option.
Other, perhaps more serious, problems with capping deposits
Most experts agree that limiting deposits will hurt credit in Spain, because anyone with some savings and a minimum of financial education will hardly sign up for a deposit on these terms.
Banks could suffer a truly significant outflow of money, since many customers might choose to take on some risk in investment funds or directly in the stock market.
If this restriction comes in, many banks will try to push bank promissory notes, subordinated debt and convertible bonds, which leads us to remind savers that these products carry risk, like any product that isn’t a deposit or public debt. (Read: Safe investments and their fine print)
The controversy is on
The National Competition Commission (CNC), Spain’s competition authority, is looking into whether this measure is legal, since it could show signs of anti-competitive behaviour by limiting the offers that banks and former savings banks can make to attract their customers’ savings.
Others think the measure will help banks’ bottom lines because they will have to pay less for their savers’ money. But if savers flee these low interest rates, the banks will take in less money and will therefore have less money to lend. In other words, less credit, when credit is precisely what Spain needs.
And another added danger
This measure could force savers to take risks in other kinds of investments without being prepared for it.
My view
In this case I don’t know the real reasons for capping the interest on deposits, because it’s hard to predict whether it will bring more negative consequences than benefits. Personally, fixed-term deposits weren’t an option for me even at 4%, so at these returns, I wouldn’t even think about it. It’s yet another measure that in no way favours ordinary citizens, because it hampers their economic growth.
As for the banks, I am quite clear that, far from benefiting, they will see the opposite effect, because some banks need to raise fresh money at particular moments and with this measure they wouldn’t be able to.
One more reason why we need to learn the basics of the stock market if we don’t want to watch our money lose value.
Featured image: Ylvaro, CC BY-SA 4.0, via Wikimedia Commons.
