As Europe’s sovereign debt crisis escalates, Germany is becoming a magnet for depositors keen to stow their savings in the euro area’s safest market.
Deposits in Germany rose 4.4 percent to 2.17 trillion euros ($2.73 trillion) as of April 30 from a year earlier, according to European Central Bank figures. Deposits in Spain, Greece and Ireland shrank 6.5 percent to 1.2 trillion euros in the same period, including a 16 percent drop for Greece, the data compiled by Bloomberg show.
As banks in Europe’s periphery fret over lost deposits, German lenders are awash in liquidity that comes on top of more than 1 trillion euros the ECB has made available in three-year loans to banks since December to ease the flow of credit. The prospect of Greece leaving the 17-nation euro region is fueling the capital flight as parties opposed to the terms of the country’s second bailout prepare for a new ballot on June 17 after winning most of the votes in elections last month.
“The longer the debt crisis lasts, the more funds will flow to Germany,” said Dieter Hein, a banking analyst with Fairesearch GmbH in Frankfurt suburb Kronberg. “People think of Germany as the euro area’s safest country.”
The funds are a boon for domestic lenders, contributing an extra 5 billion euros in customer deposits at Deutsche Bank AG from September to March. Frankfurt-based Commerzbank AG added about 7 billion euros in deposits in the first three months of 2012, helping to erase its need to tap bond markets for refinancing this year, according to a May 9 presentation.
“German banks are benefiting from a flight to quality,” Raimund Roeseler, head of banking supervision at Germany’s financial regulator Bafin, said at a June 5 press conference in Bonn. “That’s why they’re experiencing liquidity inflows and have less problems refinancing than their European peers.”
Banks outside Germany are also seeing an opportunity to tap the growing liquidity, prompting a surge in deposits at German branches of foreign lenders to 82.9 billion euros as of April 30 from 60.4 billion euros a year earlier, according to Bundesbank data.
“It makes a lot of sense actually from the banks’ point of view,” said Mark Macrae, an analyst covering emerging market banks at Prague-based brokerage Wood & Co. “Relative to what they have to pay back home, I guess that it’s an efficient way of getting liquidity.”
Savers are following bond investors, who pushed German 10-year borrowing costs to the lowest on record June 1 on increasing demand for the debt of the only euro-area country with a stable outlook on its AAA rating. The euro tumbled to an almost two-year low against the dollar last week as Europe’s leaders wrangled over how to support indebted states in the currency bloc.
European Union rules guarantee as much as 100,000 euros per depositor should an institution fail. That doesn’t help savers if the country where they hold an account exits the euro and wipes out their investments by devaluing the currency.
The European Parliament and member states have spent two years discussing a proposal to increase protection for savers by reducing to a week the time deposit insurers have to repay depositors, while requiring a depositor’s home country to arrange remuneration rather than the failed bank’s home country.
There’s at least a one-in-three chance of Greece leaving the common currency within months of the June 17 election that could halt its international bailout, according to a report this week by Standard & Poor’s Ratings Services.
An exit “could be brought about by Greece rejecting the reforms demanded” by European policy makers and the International Monetary Fund “and a consequent suspension of external financial support,” S&P said in a statement.
Spain this week called for outside support for the first time to battle the financial crisis as Budget Minister Cristobal Montoro said European institutions should help shore up the nation’s lenders. The Bankia group, the lender Spain nationalized last month, is seeking 19 billion euros of state funds to shore up its balance sheet.
European banks tumbled today, pushing the Bloomberg Europe Banks and Financial Services Index as much as 2.7 percent lower, led by Italy’s Banca Monte dei Paschi di Siena SpA and Lisbon-based Banco Espirito Santo SA.
The yield on the 10-year Spanish bond reached 6.66 percent on May 30, the highest since November, on concern bailouts for banks and regional governments will hamper Spain’s ability to service its debt. The extra yield investors demand to hold Spanish rather than German 10-year bonds increased to as much as
5.48 percentage points on June 1, the most in the euro era.
Bank deposits are a main source of funding independent of the interbank and wholesale markets. Deposits by retail clients in particular are less likely to be withdrawn quickly in times of stress because the funds are secured by state-backed deposit insurance programs.
New liquidity rules proposed by the Basel Committee on Banking Supervision stipulate that retail and small-business deposits are a source of funding that’s almost as stable as equity in crisis situations.
A loss of deposits leaves banks in Greece and Spain even more dependent on the ECB for funding.
Moody’s Investors Service, which downgraded Commerzbank and six other lenders in Germany this week, said the credit rating cuts would have been deeper if not for the banks’ diversified funding. German banks “have reduced their market funding reliance in recent years,” the rating company said in the June 6 report. “This partly reflects rising domestic deposits amidst positive economic growth.”
German lenders still face the challenge of earning money with the funds to justify the cost of taking deposits amid record low yields on German sovereign bonds, Andreas Schmitz, the president of the BdB Association of German Banks, told reporters in Frankfurt on May 23.
“There’s a trade-off to be made between net interest income and a strong and resilient funding structure,” Carola Schuler, an analyst at Moody’s, said on June 6 by phone.
Money that flows in can also flow out.
“If those funds are volatile and unlike the sticky German cash that you know you’ll have for more than three months, the banks have to invest them in short-term at low interest rates,” said Philipp Haessler, a banking analyst with Equinet Bank AG in Frankfurt.
‘Food for Thought’
Non-German banks are trying to attract customers by offering higher interest rates than German peers. New clients with 10,000 euros of available cash would get annual interest rates of 2.4 percent for deposits without maturity at Paris-based BNP Paribas SA’s Cortal Consors unit, and 2.55 percent at MoneYou, a unit of Amsterdam-based ABN Amro Bank NV, according to financial consultant FMH Finanzberatung. That compares with
0.25 percent at Deutsche Bank and 0.3 percent at most German saving banks.
Much of the cash deposited in Germany is flowing abroad via the subsidiaries of non-German banks, Georg Fahrenschon, president of the DSGV association of German savings banks said in a June 6 statement.
“German savers should have food for thought if banks have to try to lure them with offers because they enjoy comparatively low trust in their home countries,” he said.
Banks from outside the EU, such as Turkish and Russian lenders, are also targeting German savers. OAO Bank VTB, Russia’s second-largest lender, which saw its loan book grow by 50 percent to 4.6 trillion rubles ($140 billion) last year, is among banks offering some of the highest rates in Germany, according to consumer watchdog Stiftung Warentest. So is Turkiye Is Bankasi AS, whose loan book expanded by 41 percent to 101.1 billion liras ($55.4 billion).
VTB and Turkey’s Denizbank AS are using their Austrian subsidiaries to lure German customers, while Akbank TAS and Turkiye Garanti Bankasi AS are going through their Dutch arms and Isbank has a German bank unit. They rely on the deposit insurance systems of those countries to reassure German savers their money is secure.
German banks face a “luxury problem” as they have to find places to invest the deposits, and consumers may end up losing out with lower interest rates on their savings, said Haessler.
“In the end it is a question of supply and demand,” Haessler said. “The more money flows to Germany, the lower the interest on deposits should be.”