Bank of Spain draws battle lines in ongoing war of interest rates

After already issuing one warning, which was ignored by the banking sector, Central Bank officials are demanding that savings and commercial banks- those that have received public money or plan to receive it- stop their "aggressive campaigns" to attract customers to open accounts.

The Central Bank, which is headed by Miguel Ángel Fernández Ordóñez, wants to prevent a banking war that could accelerate a collapse of the institutions that offer high interest rates. Although such campaigns can help banks solve their short-term liquidity problems, it forces them into an impossible situation where they would have to pay off the high interest rates they are offering to customers after one year. Currently, some banks are offering up to five percent on some accounts when Treasury notes are listed at 3.5 percent and interest in the interbank market doesn't go beyond 1.5 percent.

Through this warning, the Bank of Spain has effectively put a halt to free market competition by clipping the wings of those institutions that have received public money. The nation's larger banks and some savings banks (popularly known as cajas in Spanish) have lodged complaints against the regulatory body because they feel that the government has "reined in" their rights to conduct business as entitled under European Commission rules.

"The banks that are in a financial bind may find themselves caving in to the more financially secure institutions," they argue.

The Bank of Spain's written warning, a copy of which has been obtained by EL PAÍS, states that the banks are engaged in a campaign that is too aggressive.

"The nominal interest rate offered must be at most equal to the average of the highest rates of the top five competing entities, with respect to comparable products," says the report adopted by the Orderly Bank Restructuring Fund (FROB) governing board, and signed by José María Roldán, general manager of the Bank of Spain's regulation bureau.

As to those competitors that decide to offer the higher interest rates, the document states: "The institutions that can offer such competitive rates should be those entities that have not received any help from the FROB."

The bank restructuring fund's committee wants to make it clear that those banks that asked for FROB assistance cannot engage in this "interest rates war."

But the banks that believe they have the right to offer these free market rates and do not want to adhere to the Bank of Spain's measure must file a complaint with the FROB "so the body can evaluate" their arguments before deciding whether to give them the go-ahead, the document states. This way, the FROB can consult, in appropriate cases, with the European Commission and issue its decision as soon as possible.

In other parts of Europe, complaints have been made against some entities, such as ING Bank, which received public aid but continued its aggressive campaign of offering high interest. ING has now changed its strategies.