On 3 June, the Spanish government approved new rules1 aimed at curtailing the intense interbank competition for customer deposits that´s come to be known as the "deposit war."
When strained economic conditions limited access to wholesale funding, Spanish banks turned to retail funding and began offering higher returns for deposits. Spain´s new law establishes a risk-based system for setting banks contribution to the Deposits Guarantee Fund (DGF). If well calibrated, it is a credit positive tool to modulate the deposit war.
To attract retail funding, banks offered above-normal interest rates on savings deposits, such as one-year term rates as high as 5%, when the ECB´s main refinancing rate stood at 1%.
Effective 3 July, the law requires Spanish banks to contribute 5x more to the DGF than the base contribution (0.06%-0.1% of the deposit balance) for current and time deposits when deposits yield more than 100 basis points or 150 basis points above Euribor.
The contribution amount varies according to the type and term of deposits and will be made quarterly. Importantly, the law allows the government to modify contribution percentages if the levels established fail to stop the deposit war.
While we view positively the new tool available to the Spanish government to modulate the deposit war, we expect its potential benefits to be constrained by Spanish banks? very limited funding options.
Many entities may be inclined to continue their deposit-gathering strategy, even at the cost of further deteriorating their already fragile P&L, which will sustain the competition for deposits.
Hence, the new plan´s effectiveness will be tied to the flexibility with which government can tailor contribution percentages if the new levels fail to stop the deposit war.
