As the financial world reels from rising interest rates, the United Kingdom’s banking sector is making waves by sharing the wealth. The UK’s financial institutions are outpacing their European and American counterparts by passing on increased interest rate benefits to savers, responding positively to the pressure from regulators, clients, and politicians.
Interest rates: A global chess game
While banks worldwide benefit from higher interest rates – profiting from the gap between the interest paid to depositors and what they charge borrowers – not all are as magnanimous in sharing these benefits.
A study by rating agency S&P has shown that banks operating in less competitive markets have been less generous. Yet, the UK banks are leading the pack, having passed on 43% of the benefits to customers in the form of higher deposit rates.
This surge in generosity could be credited to the proactive approach by the Bank of England, one of the first major central banks to raise rates, from 0.1% to 5%, since December 2021.
The UK banking sector’s competition, especially with non-banking entities, is speculated to be another contributing factor to this high deposit beta.
Nonetheless, this substantial upward trend in interest rates is not without its challenges. The soaring inflation and surging mortgage rates in the UK have caused politicians, regulators, and the Bank of England to advocate for even higher deposit rates for savers.
This is further complicated by the fact that fixed-term mortgage rates are tied to swap rates, which have seen a quicker rise than the Bank of England’s policy rate.
In comparison, US banks have only passed on 25% of the Federal Reserve’s rate increases to their customers from March 2022 to April 2023.
The competitive American market, not just among banks but also various saving products, has increased pressure on US lenders to elevate their deposit rates further.
Meanwhile, across the eurozone, where interest rates have been rising since July 2022, banks have been slow to pass on the benefits to their customers. This lagging behind in sharing the benefits with customers is attributed to the pace at which policy rates have increased compared to the past.
A closer look at the European market
In the European context, French banks have been more generous, partly due to the popular Livret A deposit account linked to inflation and set by the government.
Luxembourg banks too, have a high deposit beta, but much of this is credited to customers migrating to fixed-term accounts offering higher rates.
However, in the UK and countries like Spain, Italy, and Ireland, customers prioritize instant access to savings, resulting in a lower rate of migration to high-earning accounts.
Countries severely hit by the eurozone crisis over a decade ago, such as Spain, Greece, and Italy, where the banking sector underwent significant consolidation, have been less inclined to pass on policy rates to customers.
As this dynamic financial landscape continues to evolve, it remains to be seen how these pressures will shape the strategies of global banks. Yet, one thing is clear: UK banks are setting a benchmark by championing customer-centric policies amidst rising rates.
