Borrowing rates may be rising, but deposit rates remain at zero, frustrating depositors who see inflation erode the value of their money.<\/p>\n\n\n\n
The average interest rate on new loans in the Eurozone was 3.85%. In contrast, the average deposit rate was 1.15%. Any attempts by the Central Banks of the ECB in the member countries of the Eurozone to convince the banks to raise the interest rates on deposits are facing a wall of denial from the side of the commercial banks. The commercial banks refused and presented other solutions. Educate depositors to use other “banking products” which give higher returns.<\/p>\n\n\n\n
“Why” the banks refused, is not simple. In the past they generously gave high returns. However, after the crisis, their economic dynamics decreased significantly.<\/p>\n\n\n\n
The problem is global. Banks give returns to depositors and take profits from loans.<\/p>\n\n\n\n
When lending rates rise, for them to decide to give a higher return on deposit they would have to have a large enough floating rate loan portfolio and make enough new loans so that with these profits – plus any profits from own investments – they can cover the highest deposit returns.<\/p>\n\n\n\n
After the 2008 crisis, governments imposed stricter operating frameworks on banks with the Basel III treaty.<\/p>\n\n\n\n
In Europe, the loan-to-deposit ratio was 125% in 2015. It is now close to 104%. Also, several loans in recent years have been fixed rate and have not been adjusted upward.<\/p>\n\n\n\n
In practice, this means that banks cannot give as many loans as in the past, nor take the same risks. So, they don’t have the profitability to give significantly higher interest rates on deposits.<\/p>\n\n\n\n
The only deposit banking product is\u2026 the deposit. Every other product is an investment. So let’s turn to what depositors need to know before they are asked to change\u2026category.<\/p>\n\n\n\n
The “banking products” are probably bond mutual funds or, according to the latest information, bonds of the (Federal) Government-Public of the member country, which its government is thinking of offering to the investing public.<\/p>\n\n\n\n
Perhaps even the refusal of the banks to offer higher interest rates is an opportunity for the government of the Eurozone member country, as it will be able to give – among its bonds – much higher returns.<\/p>\n\n\n\n
As far as the government bonds of the member country are concerned, things are relatively simple. If someone believes that over the life of the bond the chance of their government defaulting is relatively small, they can trust it. If he does not trust the eternal stability of the member country’s governments, then perhaps he should turn to other solutions.<\/p>\n\n\n\n
In addition to domestic bond funds, there are many mutual funds consisting of foreign corporate and government bonds. In most cases, the bulk of the portfolio is in highly investment rated bonds.<\/p>\n\n\n\n
What should one know?<\/strong><\/p>\n\n\n\n 1. <\/strong>It’s not for everyone. The European legislation, the so-called MiFid II, is quite strict and the potential investor must pass a suitability test before an investment proposal is made.<\/p>\n\n\n\n 2.<\/strong> Investment grade does not mean there is no risk. It exists, and in fact in several forms.<\/p>\n\n\n\n a) Price risk. b) Risk of shearing. 3.<\/strong> They are diversified. Legislation obliges managers to diversify investments to reduce risk.<\/p>\n\n\n\n 4.<\/strong> They have costs. These are approximately from 0.4% of the investment to 1% of the investment per year.<\/p>\n\n\n\n 5.<\/strong> For larger investment amounts, many banks give access to mutual funds of large foreign companies, with some extra distribution costs.<\/p>\n\n\n\n 6.<\/strong> The fund (mutual fund) is not insolvent. Even if the bank fails, a mutual fund is owned by its investors and protected by the custodian.<\/p>\n\n\n\n What one should remember is that choosing such investments is not easy. It becomes even more difficult if one does not have the ability to speak to administrators themselves. Before switching from a depositor to an investor it is a good idea to talk to an expert you trust.<\/p>\n\n\n\n The Liberal Globe’s personal opinion, however, is that the move will have limited success. After 2008, selling investment products is a complicated business and the law is strict. It is not practical to convert the millions of depositors into investors.<\/p>\n","protected":false},"excerpt":{"rendered":" Borrowing rates may be rising, but deposit rates remain at zero, frustrating depositors who see inflation erode the value of their money. The average…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5,961],"tags":[875,3355,1049],"class_list":["post-15053","post","type-post","status-publish","format-standard","hentry","category-economic","category-financial-economics","tag-banks","tag-deposits","tag-investments"],"_links":{"self":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/15053","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=15053"}],"version-history":[{"count":1,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/15053\/revisions"}],"predecessor-version":[{"id":15055,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/15053\/revisions\/15055"}],"wp:attachment":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=15053"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=15053"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=15053"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
Bond prices move according to the markets. Their volatility depends on many factors, the most basic of which is their “duration”, a complex calculation that is also related to the maturity horizon of the bond. The longer the duration, the higher the price risk, but also the potential return. Its geographical exposure is also important. If someone does not trust Greece, for example, then they should go to bonds of foreign countries that they trust. The investor is also advised to ask for the CV of the manager. Bonds are tricky and need experience behind the wheel.<\/p>\n\n\n\n
The investor must make sure that the bonds are of high credit rating and that there are many of them so that if one defaults, there are no significant losses in the portfolio.<\/p>\n\n\n\n