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Banks recommended to cap interest on savings accounts

Source: Reuters - Thu 10th Jan 2013
Banks recommended to cap interest on savings accounts

The Bank of Spain has recommended lenders cap interest rates on deposit accounts, 3 banking sources said on Thursday, in an attempt to quell a profit-eroding price war aimed at boosting capital.

Many of Spain's lenders have been cranking up deposit rates on timed accounts to lure more customers in a battle for funds at a time of restricted access to international money markets for Spanish banks during the euro zone debt crisis.

Spain's weakest banks have received most of a €39 billion European credit lifeline aimed at plugging a capital gap stemming from a decade-long property boom and subsequent crash.

The central bank has made an informal, verbal recommendation to banks to cap interest rates at 1.75% for 1 year deposits, rising to 2.75% for deposits of over 1 year, the sources said.

"The banks usually play ball on these verbal recommendations," said one banking source, who spoke on condition of anonymity.

A Bank of Spain source said there had been no written recommendation and declined to comment on whether there had been a verbal request.

Many Spanish banks have been offering more than 3% to new clients on long-term deposits in a profit-sapping practice meaning lenders pay out more on deposits than they can make on advances, with variable-rate mortgages costing as little as 1.5%.

"This is very good news for banks as it will reduce the cost of funding with an immediate positive earnings impact," said Francisco Riquel, analyst at N+1 broker.

N+1 estimated the move could mean a 25 percent boost on pre-provision profits for those banks with the most expensive cost of funding, like Popular, Sabadell and Bankinter.

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The central bank lifted penalties on high interest offers in August after previous restrictions put in place to prevent a price war made banks funnel clients' money out of deposits into their own short-term paper, heightening the perception of a capital flight from Spain.

The news is expected to result in a wave of Expats review their investments and savings accounts.

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