Government bids to bring halt to banks' deposit war

Spain's Economy Ministry is preparing a decree to punish banks that offer very high interest rates in an effort to attract deposits way from their competitors.

Banks that offer rates above a certain level will be obliged to double the amount they are required to leave in the Deposit Guarantee Fund, according to a report Wednesday by financial daily Cinco Días, which forms part of the stable of publications of Grupo PRISA, the owner of EL PAÍS.

Much to the displeasure of the Bank of Spain, the sector has been engaging in a deposit war now for several months in order to improve liquidity after the debt crisis in the euro zone cut off traditional wholesale funding sources for many lenders.

Some banks are offering annual deposit rates of 4 percent, thereby, narrowing their margins and restricting their ability to lend. The practice also ends up increasing the borrowing costs of households and companies.

The decree move follows repeated calls by the central bank to put an end to what it feels is a self-defeating practice.

In reporting a 20-percent fall in its first-quarter earnings on Tuesday, Banesto, the domestic retail banking unit of leading Spanish lender Santander, partly attributed the downturn to "intense" competition in the sector. Banesto's net interest income ? the difference between what it pays on deposits and charges for loans ? declined 11.2 percent.

The draft legislation being prepared penalizes banks offering fixed-term deposits of six months or longer at rates of more than 150 basis points above the six-month euribor interbank rate. With six-month euribor currently at about 1.6 percent, that implies that banks offering deposit rates of over 3.1 percent will pay the penalty.

For three-month deposits the threshold will be set at about 2.9 percent on the basis of the current three-month euribor rate, and for deposits with no fixed period, the limit will be one-month euribor, currently at 1.13 percent, plus 100 basis points.

The Bank of Spain will publish the respective thresholds rates on a quarterly basis.