0% deposits interest by Bank Cartel S.A.

John Felipe Branch, economics

The current deposit interest rate offered by the European central bank is 3%.

It should directly translate into a higher deposit interest payment to citizens for their deposits at their local bank and savings account, for a reason, to tame the inflation. People should bring their money from spending or from speculative markets (e.g. housing) towards saving. And that’s pretty much what our monetary system functioning is based on.

However this is not happening. Why?

We have the always greedy and (nowadays) fearing bank cartel.

The greed part: we do not pay you for your savings, at the same time we get paid by the European bank our risk free 3%, we cash in the difference. You get cero.

The fairing part: a deposit war (i.e. also called normal competition) where banks try to offer you the closest possible interest payment for your deposits. They do not want this because it would trigger a quick transfer of customers funds from bank to bank, risking having to actually give back money they of course do not have to a 100%. A quick explanation, why they do not have this money. A bank takes your money and places it on financial instruments, or/and lends your money, those instruments are called secured or supposed to be secured. However there are not fully secured financial instruments on financial markets, you have to pay a premium to cover any risks.

A customer moving to a new bank means having to sell some of the financial instruments at market value to give to the fully liquid money, for the deposit to deposit operation. The value could be slightly inferior to the amount owed to the customer at the time of selling. Then someone eats the losses and this poses stability risks on the Bank Cartel S.A.

Recent example: Silicon Valley Bank

Have you heard about the bankruptcy of the Silicon Valley Bank? The above explained is what happened there, their customers, mostly companies with really high balances moved to new banks offering better interest payment. The banks sold their supposed to be secured instruments and found out that they were undervalued and having to tell savers that they couldn’t meet the transfer requests.

On top of this Bank Cartel S.A. have spent past years giving away loans for houses acquisition at fixed interests rates. So now they are getting very little return on lended money, and have less for the depositors. The housing bubble must be paid off by savers, again.

It could all be that I am misunderstanding something, however mostly sure I am understanding everything.