Spain cracks down on bank interest rate war

Spain's government Friday announced a crackdown on a war between commercial banks offering ever higher deposit rates in a cut-throat battle for customers.
The government introduced a new regime to curb the competition, fearing it may further damage profits at Spain's banks, many of them still mopping up the bad loans from an exploded property bubble.
Under the new rules, banks are encouraged not to offer interest rates too far above the eurozone's benchmark Euribor rate, with variations allowed depending on the deposit period.
On average, the maximum deposit rate allowed under the new regime is now about 3.0 percent.
Any bank that takes the risk of offering deposit rates above the government-imposed ceiling would be forced to offset the liability at punitive levels.
For every euro a commercial bank accepts into such high-rate accounts, it would be forced to set aside another five euros into a deposit guarantee fund.
Acting in line with a Bank of Spain request, "we are introducing a new risk-linked regime for contributions to deposit guarantee funds," the Finance Ministry said in a statement.
The authorities had been concerned about astronomical rates on offer for new deposit accounts of 3.5 percent, 4.0 percent, even 4.75 percent a year. Few other European countries offer such returns.
In addition to the high rates, Spanish banks also offer gifts for new customers from iPads to Blu-ray recorders.
Financial markets, worried about the weakness of the Spanish economy, have tightened -- and in some cases closed off entirely -- banks' access to the interbank market for overnight loans, their classic financing mechanism.
Many banks, therefore, started offering high-rate deposit accounts as a new source of funds.

 

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