The ECB offers a 3.75% return to banks holding their liquidity in Frankfurt, risk-free. However, checking accounts have remained at zero interest until now.
This delay in adjustment has also caught the attention of the Fed, which has conducted a study on the reasons behind the low and slow transmission of ECB rates to deposit yields in the Eurozone
In the end, the first significant step was taken by a Spanish bank: BBVA launched an offer to remunerate checking account balances, challenging the Italian landscape where no credit institutions are ready to pay interest on account balances. BBVA’s checking account offers a 4% return on the balance, with no minimum amounts, until January 31, 2025. At this moment, the offer, extended to BBVA’s existing customers as well, represents a unique proposition. According to data from the aggregator Confrontaconti.it, the only other bank offering a balance remuneration is Ibl Banca, but only for new customers (with a 3.3% yield for one year).
“We want to offer our customers a product where they can always have their money available without losing out on the benefits of interest rates. This action aligns with our strategy: providing the best experience for Italian customers,” said Javier Lipuzcoa, Head of Digital Banking Italy to We Wealth. “We will continue to work on new products, such as investment products, insurance, or mortgages; we aim to become the top bank for Italian customers.” In less than four months, Bbva plans to significantly increase its number of customers. “We have reached 250,000 customers since we ‘landed’ in Italy, and our plan is to reach 320,000 by the end of the year.”
BBVA’s move comes at a time when, in just over a year, the rates that banks receive from the ECB on their reserves have gone from -0.5% to +3.75%. This risk-free gain has not been matched by an adjustment in checking account remunerations. Commercial banks have been reluctant to raise the interest rates offered on deposits, not only in Italy but elsewhere as well.
The Italian Banking Association itself, in response to government appeals, had defined the checking account as a “service,” suggesting that customers should turn to more restrictive forms such as time deposits to seek remuneration. BBVA’s move changes the game by reintroducing the idea, which had long been forgotten, that a checking account can offer a small interest to customers.
Margins are Increasing Without Raising Checking Account Rates
The growing gap between high credit interest rates and banking funding costs has boosted the profits of Italian banks since the second half of 2022. According to an analysis of semi-annual reports conducted by We Wealth, in the first half of 2023, the top five Italian banks by assets (Intesa, Unicredit, Banco Bpm, Bper, and Mps) increased their interest margin by 53%, surpassing a total of 19 billion euros. The awareness that ECB rates could decrease again in 2024 is pushing banks to limit checking account remuneration as much as possible to offset the future decline in interest margins.
However, this may not be the only reason why the transmission of reference rates (passthrough) has been so poor, leaving checking accounts with zero remuneration. The reluctance of European banks to adjust the yield on checking accounts (and deposit accounts) after rate hikes has been an anomaly. Two economists from the Federal Reserve Board of Governors noted in a study last July that “the passthrough on deposit rates has been even slower than in previous episodes of monetary tightening.” They suggested that banks delayed adjusting rates due to an abundance of excess reserves, favored by the monetary easing policies of the COVID era. When excess liquidity reserves are abundant, banks prefer to deposit them with the central bank and earn interest offered by it, rather than extending credit to households and businesses. In these conditions, banks have “little incentive to attract [additional] deposits and are therefore less willing to raise rates” on checking accounts.
Moreover, keeping remunerations on accounts low has a positive effect on bank profits and is “an important factor in determining how much banks benefit from increases in reference rates,” according to the Fed economists. “The slower deposit repricing in the future, the higher bank profits will be, all other conditions being equal.”
At some point, competition for checking account offers could become more intense. So far, customers looking for an interest-bearing checking account have had few or no alternatives. “With further increases in reference rates [ECB], it is likely that competition for deposits and, consequently, passthrough will increase in all countries.” BBVA’s move could be the first step in a new phase of competition for checking accounts among Italian banks.
