Monday, July 2, 2012

Trying to keep deposits in Spain

How does Banco de Sabadell, Spain's 5th largest bank try to keep depositors from moving cash to Germany or Switzerland? They offer up a juicy deposit rate. The bigger the portion of your deposit you are wiling to lock up for a year ("Fund"), the more they will pay.

This is expensive. And some of the smaller banks pay even more. In fact Spain's banks pay more for deposits than they make on mortgages. Why bother when you can replace depositors with the ECB.
Bloomberg: - While Spain’s two largest lenders, Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), earn most of their income outside the country, smaller banks depend on domestic business. Most are paying higher rates for deposits than they earn on mortgages. Their most profitable trade -- borrowing at 1 percent from the European Central Bank and lending to the Spanish government at 6 percent -- risks bankrupting the country.
While the recapitalization program should help, ultimately the government is crowding out private credit. A banking system that borrows from the ECB and lends to the government can sustain itself for a while but will be of limited value for economic growth.
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